Global Markets Shaken as Iran Conflict Intensifies, Fueling Inflation Fears
Good morning and welcome to the City AM liveblog. Inflation fears continue to dominate global markets as tensions between Israel and Iran escalate. The FTSE 100 closed Thursday’s session down 1.5 percent at 10,413.94p, reflecting renewed concerns about a potential energy crisis.
Oil Prices Surge Amidst Middle East Uncertainty
Brent crude, the international benchmark for oil, edged back up towards the $84 a barrel mark, up from $80.75 at the same time on Wednesday. This surge is directly linked to the ongoing hostilities in the Middle East, particularly around the Strait of Hormuz, a critical waterway for global oil supplies.
The moves once again flagged inflation fears, ahead of the Bank of England’s meeting later this month when they will decide whether to cut interest rates.
Geopolitical Risks and Market Response
David Morrison at Trade Nation noted, “Oil prices remain elevated, and as things stand there’s no sign that either WTI or Brent looks set to reverse direction.” He further emphasized that oil prices have been heavily influenced by headlines concerning the conflict, especially regarding the Strait of Hormuz.
Prime Minister Sir Keir Starmer has vowed to “resist” pressure on the UK’s response to the conflict with Iran, defending Britain’s “level-headed” military response. He announced that additional Typhoon jets would be sent to Qatar to bolster defensive capabilities. Starmer also cautioned that the current conflict may not have a quick resolution, a sentiment contributing to elevated risk aversion in markets.
Broader Market Impact
The escalating tensions have triggered a global selloff. The FTSE 100 and France’s CAC both fell 1.5%, even as Germany’s DAX and Italy’s FTSE MIB declined by 1.6%. The Dow Jones experienced a 2% drop.
Oil tankers in the Strait of Hormuz have effectively been closed since the weekend, impacting approximately a fifth of global oil supplies. This closure has significantly contributed to the rise in oil prices.
European gas prices have also increased, rising more than 3%. Brent crude has jumped 15% in the past five days.
Inflationary Pressures and Economic Outlook
The US-Israel war with Iran is driving up the price of oil and gas, triggering fears of a renewed inflation shock and dampening hopes of interest rate cuts. Experts warn that sustained high oil and gas prices could make goods and services more expensive.
David Miles, committee member at the Office for Budget Responsibility, indicated that the rate of inflation in the UK could increase by around 1% if oil and gas prices remain at current levels. However, he noted that these increases are not as substantial as those seen following Russia’s invasion of Ukraine.
Brent crude prices have jumped by 12% since Israel and the US began bombing Iran on Saturday, and Tehran responded by attacking neighboring Arab countries. Recent reports include attempted drone attacks on Saudi Arabia’s Ras Tanura oil refinery and the suspension of Liquified Natural Gas (LNG) production by QatarEnergy.