European shares slip as U.S.-Iran talks stall

European shares slipped on Wednesday, pausing after a strong second-quarter finish as investors grew cautious over signs that peace talks between the United States and Iran have hit a fresh impasse, while expectations of further interest rate increases from major central banks added to the pressure.

Geopolitical Uncertainty Weighs on Sentiment

The pan-European STOXX 600 edged lower on the first trading day of the third quarter, with Reuters reporting that doubts over the U.S.-Iran diplomatic process weighed on risk appetite. The selloff came despite a strong end to June, when markets had rallied on optimism surrounding a memorandum of understanding signed between Washington and Tehran in mid-June that was expected to reopen the Strait of Hormuz.reuters+1

However, talks in Doha this week have failed to produce a breakthrough. On Tuesday, Qatar confirmed that while technical discussions between the two sides are continuing, no high-level meetings are currently taking place between U.S. and Iranian officials. U.S. envoys Steve Witkoff and Jared Kushner met with Qatar's prime minister on Monday to discuss the negotiations, but Iran has indicated it is only sending a delegation to follow up on implementation of the ceasefire memorandum, not to engage in direct talks with Washington.cnn+1

Rate Hike Expectations Compound Pressure

Adding to the cautious mood, investors remain on edge over monetary policy tightening. Markets are pricing in a 25-basis-point hike from the Federal Reserve with over a 50% probability of a second increase by year-end, while traders also expect the European Central Bank to raise borrowing costs by an additional 25 basis points later in 2026.finance.yahoo+1

The ECB's annual Sintra Forum, running from June 29 to July 1, has provided a backdrop of hawkish policy signals throughout the week. ECB President Christine Lagarde has downplayed concerns about second-round inflation effects, though markets have largely shrugged off those reassurances.ecb.europa+1

Earnings Season Approaches

With second-quarter corporate earnings season approaching, investors are balancing geopolitical and monetary policy risks against hopes for solid results. J.P. Morgan recently raised its year-end STOXX 600 target to 680 from 630, implying roughly 6-7% upside from current levels around 635-640. Still, Asian markets also opened the quarter hesitantly, with Reuters describing the mood as one of "digesting the meaty gains made last quarter" while "U.S.-Iran talks are busy going nowhere".reuters+1