[MARKET ANALYSIS] European equities hit as Iran conflict continues, which helps key Defence names; Oil prices weigh on US equities

European bourses (STOXX 600 -0.4%) have started the cash session on the backfoot, with higher oil prices continuing to weigh on growth prospects. Weakness in Banks continue to affect the IBEX 35 (-1.0%), given its exposure. The DAX 40 (-0.1%) is modestly lower, but losses are limited due to Zalando (+7.6%), Rheinmetall (+3.3%) and Hannover Re (+5.7%).
Sectors are broadly in the red, with Banks (-2.0%) continuing to underperform. Automobiles (-1.1%) also sit near the bottom of the pile after BMW (-1.4%) missed Q4 sales estimates and forecast higher tariffs acting as a headwind on EBIT margin. Basic Resources (+0.5%) are benefiting from the rise in metals prices, while Chemicals (+0.5%) gain after K+S (+6.5%) beat Adj. EBITDA estimates.
Key movers to start the session include Zalando (+7.6%), RWE (+2.5%) and defence names such as BAE Systems (+3.2%), Babcock (+2.9%) and Leonardo (+7.8%). For Zalando, the Co's FY adjusted EBIT and 2026 mid-point for the metric beat estimates, while they also announced a share buyback programme of up to EUR 300mln. RWE reported 2025 Adj. EBITDA which beat estimates and stated that it will build its first US gas plant. Finally, defence names have been boosted due to the ongoing conflict in Iran, with no end in sight. Additionally, for Leonardo, the Co. reported positive FY earnings and raised its 2026 guidance.
US equity futures (ES/NQ -0.5%, RTY -1.2%), similar to their European peers, continue to be weighed on by higher oil prices. Correlation between the ES and WTI has become increasingly inverse, now lying at c. -0.8.