The FTSE 100 slipped on Friday after Israel launched an attack on Iran’s nuclear facilities and Iran responded with a drone attack.
Oil prices soared and stocks sank in the immediate reaction. Risk aversion spread through markets sending European equities sharply lower.
“‘Israel strikes Iranian nuclear facilities’ is always a shocking headline to read, so it’s no surprise the immediate financial market reaction was significant, with oil prices surging by as much as 10% at one point,” said Michael Field, chief equity strategist at Morningstar.
“Thankfully markets have calmed since, as participants have had time to digest the news fully and assess the real impact of Israeli strikes. Currently, the oil price is up around 6% and equity markets down less than 1%, which gives us a good indication as to what equity markets are thinking.”
The FTSE 100 fared better than most with its weighting towards oil providing support for the index. BP and Shell gained around 2% and helped offset heavy losses elsewhere.
“Oil majors Shell and BP both felt the tailwind of rising oil prices, while precious metal producers Endeavour Mining and Fresnillo both had a good day,” explained Derren Nathan, head of equity research, Hargreaves Lansdown.
Airlines were down sharply. IAG lost 4% and easyJet dropped 3%.
The spike in Middle East tensions overnight have sparked a wave of selling in equity markets that were already vulnerable to a sell off.
After a riproaring rally since the post-Trump tariff lows, stocks markets had begun to trade sideways and struggled for direction. Israel’s strike on Iran has proved to be the catalyst traders needed to take some risk off the table.
“Equity markets have risen for two months and had begun to flag, and news prompted sharp drops. While futures have edged higher, we can expect more short-term volatility as the two sides trade further blows,” said Chris Beauchamp, Chief Market Analyst at IG.