European markets surge on Ukraine peace talks, but risks loom

European share prices have surged following President Trump’s announcement of peace talks with President Putin over Ukraine. Investors are optimistic that this could not only bring an end to the war but also drive down gas prices – potentially a major win. 

However, while we may all welcome the prospect of resolving the conflict, and cranking up the thermostat, a closer look at the ongoing situation suggests that it may bring new uncertainties to Europe’s economic landscape, as markets risk shifting onto unstable ground.

So far, European markets have responded enthusiastically to the news of negotiations. Germany’s DAX rose by 2.1%, France’s CAC 40 gained 1.5%, and the Stoxx Europe 600 index climbed 1.1%, reaching a new high – all reflecting investor confidence in a potential resolution to the conflict. The euro has strengthened, and natural gas prices have dropped as much as 8.7%, with Goldman Sachs projecting a possible 50% reduction in energy costs if Russian gas flows normalise. Such lowering of energy prices could ease inflationary pressures, boost consumer confidence, and improve margins across Europe – at least in the short term. 

Still, despite these positive indicators, the emergency summit of European leaders held in Paris on February 17th serves as a warning that market optimism may be premature. The unilateral US-Russia negotiations have so far excluded both European and Ukrainian representatives, sparking growing concerns about Europe’s diminishing role in shaping its own geopolitical future and escalating a sense of urgency.

President Volodymyr Zelenskyy of Ukraine has made it clear that his country will not stand by while major powers negotiate its fate without its involvement. A deal reached without Ukrainian and European input risks weakening the EU’s standing on the global stage and forcing its markets to react to decisions made in Washington and Moscow.

Erosion of Europe’s role in global decision-making could lead to unfavourable trade conditions, while the re-establishment of Russian energy dominance without safeguards could leave Europe once again dependent on a volatile supplier, exposing markets to future supply shocks. Moreover, a deal that heavily favours Russia, could embolden Putin to cast his eye toward broader territorial ambitions in Europe, increasing geopolitical tensions. Yet another scenario that would likely cause investor confidence to wane and capital to flow out of European markets. 

The bottom line is that without a seat at the table, Europe risks being on the menu. While markets may be climbing now, the long-term outlook remains uncertain. Investors and businesses should proceed with caution and prepare for potential challenges if Europe is forced to adjust to a new reality that it had no role in shaping.