Investor sentiment was primarily dampened by the cracks that quickly emerged in the Persian Gulf ceasefire, pushing oil prices higher once again and reminding markets of the inflationary impact of the conflict.
The market remained focused on whether the ceasefire can be sustained and if it could lead to more lasting peace talks. Iran stated it would be "unreasonable" to proceed with talks with the United States following Israeli strikes in Lebanon, while U.S. President Donald Trump warned of a major military escalation should the peace process with Tehran fail.
At the same time, the Strait of Hormuz remained closed to vessels navigating without permission, as Iran flexed its control over this key oil artery and demanded tolls to guarantee safe passage. In this context, oil prices rebounded after Wednesday's slump.
With crude prices still around 40% above pre-conflict levels, the spike in inflation threatens to begin reflecting in global macroeconomic data. In this regard, the market awaits the U.S. core price data for February (1230 GMT), which according to a Reuters poll could show a 0.4% increase for the second consecutive month, despite being an indicator that predates the surge in energy costs.
The war has drastically reshaped interest rate expectations: rising energy costs and their inflationary impact have led markets to rule out cuts by major central banks and even to anticipate potential hikes.
Minutes from the Federal Reserve's (Fed) latest monetary policy meeting showed that a growing number of members believed a rate hike might be necessary to contain inflation, although many remained confident that the next move would still be a cut.
According to LSEG's IRPR tool, markets are pricing in almost no Fed cuts this year -- just 6.6 basis points -- while the probability of rate hikes as early as June reaches 84% for the European Central Bank (ECB) and 60% for the Bank of England (BoE).
After rising nearly 4% the previous day, at 0715 GMT on Thursday, the Spanish benchmark IBEX 35 fell 14.30 points, or 0.08%, to 18,118.00 points, while the FTSE Eurofirst 300 index of leading European shares retreated 0.16%.
In the banking sector, Santander lost 0.65%, BBVA fell 0.26%, Caixabank shed 0.42%, Sabadell gained 0.62%, Bankinter rose 0.07%, and Unicaja Banco lost 0.15%.
Among non-financial heavyweights, Telefónica retreated 0.18%, Inditex shed 0.45%, Iberdrola rose 0.59%, Cellnex gained 0.03%, and the oil major Repsol climbed 0.93%.
(Reporting by Tomás Cobos; editing by Benjamín Mejías Valencia)
