The FTSE 100 was flat on Tuesday as oil prices rose, proving a double-edged sword, with gains for oil majors offset by interest-rate-sensitive sectors.
Although oil prices have steadily increased in recent weeks, investors have largely ignored it, with attention on US technology volatility and the ongoing AI boom.
But that all changed on Tuesday after the US President threatened to bomb its ally Oman and the 60-day deadline for a peace deal with Iran expired.
An extension seems to be unlikely, with posturing by the US and Iran pointing towards escalation rather than de-escalation. Oil prices rose on Tuesday as a result.
The FTSE 100 was higher by 6 points at the time of writing.
“The latest oil price movements are both a pain and a gain for UK investors,” said Dan Coatsworth, head of markets at AJ Bell.
“Brent crude edged higher, hitting $91.45 a barrel in early trading as tensions intensified in the Middle East. That’s bad for businesses and consumers, but good for the FTSE 100’s oil heavyweights BP and Shell who propped up the UK blue-chip index amid a broader European market pullback.
“Efforts to bring an end to the war have not been successful, and reports suggest Iran will now become more aggressive. That raises the risk of further disruption to oil supplies out of the Middle East, hence why inflation fears and potential interest rate hikes are front of mind for investors. This scenario is negative for equities as it can dampen risk appetite.”
The risk-off tone to trade on Tuesday was underscored by BT being the FTSE 100’s top riser with a gain of 2.2%. Shell and BP rose 1.2% and 1.8%, respectively, doing much of the heavy lifting in keeping the index flat.
US futures were pointing to a lower open on Tuesday, as reflected in declines in US tech-focused investment trusts, which were among the worst hit.
A steady rally in housebuilders has been stopped in its tracks by concerns about higher oil prices and their potential impact on interest rates. Persimmon and Barratt Redrow were down close to 2%.
A rally for the FTSE 100’s miners yesterday proved to be short-lived as Antofagasta, Fresnillo and Endeavour Mining all dropping on Tuesday.