The FTSE 100 slipped back on Monday after Middle East tensions ratcheted higher over the weekend.
Equities took a step down following reports that Iran fired rockets at Israel for the first time since the April ceasefire in response to Israeli attacks on Lebanon. Despite pressure from Donald Trump not to retaliate, Israel responded with strikes on Iran.
“Hopes have been dashed for the two key things investors desperately wanted – an end to the Iran war and interest rates not to go up,” says Dan Coatsworth, head of markets at AJ Bell.
“Investors have been on the edge of their seat waiting for a breakthrough in Middle East negotiations. Renewed fighting between Iran and Israel has thrown cold water on the prospect of a resolution any time soon, meaning the focus shifts back to worries about oil supplies and what that means for inflation.
But the markets took the step-up in tensions in stride, with oil inevitably rising but staying below the key $100 level as traders grow sensitised to the conflict and the market impact.
The big issue is whether central banks have to hike rates – but there was only a whisper of this concern on Monday.
“Central banks would normally raise rates to fight inflation, and there have been market expectations for a hike ever since the Iran war began,” Russ Mould said.
“In theory, a sustained inflation shock could hurt the economy and central banks would eventually cut rates to stimulate spending. That could be a story for another day though, particularly as the latest jobs data from the US would suggest the Middle East conflict has yet to cause economic disruption given a strong labour market.”
Given the degree of the escalation over the weekend, an FTSE 100 down 0.3% at the time of writing seems an acceptable result for UK stocks.
The index held above 10,300, with oil stocks and defensive names offsetting losses in UK-centric and interest-rate-sensitive sectors.
Barratt Redrow and Marks and Spencer were among the heaviest hit as investors rotated into BP, Shell and British American Tobacco.