FTSE 100 lower as BP and Shell dip amid Middle East tensions, BAE jumps

FTSE 100 oil majors started the week on the back foot dragging the index lower as the oil price reacted to an escalation in Middle East tensions after the Islamic Republic of Iran regime launched an attack on Israel.

London’s leading index was down 0.4% at the time of writing, with BP and Shell down 2.8% and 10.9%, respectively.

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“The week is starting on a fraught note, with unease still clouding sentiment. Investors are on alert for retaliatory action following Iran’s attack on Israel. Fears are brewing that a dangerous new episode of escalating conflict is about to roll. All eyes are on diplomatic efforts being made to diffuse the situation which have helped bring down a spike in oil prices,” said Susannah Streeter, head of money and markets, Hargreaves Lansdown.

“The FTSE 100 has been on the back foot in early trade, retreating away from record levels which the index flirted with on Friday. Although defence company BAE Systems has gained fresh ground amid expectations of higher military spending, energy stocks are on the back foot, as oil prices have retreated a little.”

Regime military leaders orchestrated a response to Israel’s bombing of a consulate in Syria, firing hundreds of unmanned drones and missiles towards Israel. Most were intercepted and the damage in Israel was minimal.

Oil traded negatively on Monday, dragging on the commodity-heavy FTSE 100, as markets removed geopolitical risk premiums from Brent and WTI. With Iran having made its move, uncertainty around possible escalation has diminished and the crisis has a sense of containment.

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Helping calm the nerves in energy markets, analysts argue the Iranian regime wanted to be seen to respond to Israel but had little appetite for a wider conflict.

Nonetheless, the step up in Middle East tensions over the weekend was significant and BAE Systems shares reacted accordingly with a 1.7% as investors bet on increased defence spending.

With oil prices looking set to remain elevated for the foreseeable future, the main factor concerning investors on Monday is the possibility of higher inflation rates if oil surpasses $100. US CPI was hotter than expected in March and the last thing markets want to see is it creep higher due to higher energy prices.

“Concerns have also deepened about stubborn inflation in the United States, following a rebound in the headline CPI rate in March. There’s now a big rethink taking place about when the Fed will be confident enough to cut interest rates, with more hopes sliding away from a June date and September being increasingly pencilled in instead,” Streeter said.

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