The FTSE 100 was feeling the pressure of lower oil prices on Monday as oil prices sank on hopes of a step down in tensions in the Middle East after Israel launched a reserved retaliatory attack against Iran over the weekend.
Oil prices sank over 4% at the beginning of trade on Monday as traders reacted to the first sign of restraint in attacks back and forth between Israel and Iran, raising hopes of a broader de-escalation in the conflict.
“The Israeli attack, which avoided vital facilities such as nuclear and oil sites in Iran, significantly reduced the uncertainty that had reigned in the previous weeks,” said Antonio Ernesto Di Giacomo, Senior Market Analyst at XS.com.
“In response, Brent prices stabilized around $73 per barrel, while West Texas Intermediate (WTI) crude dropped to the $68 per barrel range. This downward price movement suggests that investors found reasons to reduce their risk perception in the attack, given that Iran’s strategic infrastructures were not directly affected.”
Lower oil prices ultimately drove the FTSE 100 on Monday, with oil majors Shell and BP shaving off a considerable number of points from the index as they both fell over 2%. However, a midday rally saw the index turn positive as we entered afternoon trade.
The negative mood in London was compounded by another 3% drop in Lloyds shares. Lloyds was down again following an unfavourable Court of Appeal ruling on Friday that has potentially opened the doors to billions in redress for motor financing customers.
“Lloyds was in damage control mode on Monday morning after Friday’s ruling on motor finance commission arrangements at the Court of Appeal potentially broadened the scope of the scandal,” said Danni Hewson, head of financial analysis at AJ Bell.
“This will increase nervousness ahead of the FCA’s own probe into the issue and potentially prolong the agony for Lloyds and the other names affected. If the regulator does adopt a wider lens thanks to this latest ruling then the results of its investigation may well come in later than May, which was when a judgement had been expected.
“For now, Lloyds has put out what is very much a holding statement, with the shares only showing limited damage this morning after a more meaningful slump on Friday afternoon. It will be telling to see if the company proactively increases any provisions made for compensating customers, although given the remaining uncertainties quantifying the impact will be tricky.”
Budget
Investors will be gearing up for this week’s budget and a raft of measures that could curtail growth in the near term. There is an argument the pessimism around the budget is already built into equity prices but the tarders will be cautious going into the event given the reaction similar fiscal announcements have had in recent years.
The FTSE 100 has traded in a range of around 200 points since the beginning of August, with investors showing little appetite to make big bets on UK stocks that could take the index to a fresh all-time high, but at the same time, investors see value in their exposure to the defensive corners of the market, providing support for London’s flagship index.
The budget has the potential to provide a catalyst for the FTSE 100 to break this range.