The FTSE 100 tumbled on Monday as oil prices soared above $100 to the highest level since 2022, raising fears of interest rate hikes and possible stagflation.
Much of last week’s discussion centered on the implications of an oil price above $100 for the global economy and financial markets. Oil crept higher last week but closed out Friday’s session still some distance from the key psychological level.
However, developments in the Middle East over the weekend meant that traders very quickly found out the impact of oil trading above the $100 mark after Brent oil traded as much as 22% higher in Asian trading overnight.
With oil trading like a penny stock, fear swept through financial markets, sending the FTSE 100 sharply lower on the open as UK 10-year bond yields surged to 4.75%.
The FTSE 100 was down 1.2% at the time of writing after bouncing off the worst levels of the session. The index was down some 190 points in the early minutes of trading on Monday.
Susannah Streeter, Chief Investment Strategist, Wealth Club, said: “Panic has hit equity markets after oil prices rocketed as fears materialised about a big squeeze in global supplies. London’s FTSE 100 has opened sharply lower, after steep falls in Asia, with the Nikkei plummeting 5% and South Korea’s Kospi almost 6% lower, adding to deep losses last week.”
“Crude prices shot up by more than a quarter as trading got underway on oil markets. It’s been the biggest jump since the outbreak of the pandemic, and investors are bracing for an inflation crisis.”
Some of the first signs of the inflation crisis can be found in interest rate derivatives markets, which are now pricing in rate hikes by the Bank of England and the European Central Bank by the end of the year. This is in sharp contrast to just 10 days ago, when investors were trying to work out how many cuts there would be this year.
Potential interest rate hikes sent waves through UK stocks on Monday, with interest rate-sensitive sectors among the heaviest hit.
FTSE 100 housebuilders are the go-to proxy for concerns about interest rates, and Persimmon fell 5% while Barratt and Redrow lost 3%. Traders are now pricing at least one rate hike this year – something the UK property market needs like a hole in the head.
British Land and Segro were both down close to 5%.
The risk of a broader slowdown in economic activity was reflected in mining stocks as investors choose to focus on global growth rather the inflation hedge commodities can sometimes provide. Anglo American was the FTSE 100’s top faller, tumbling 5.3% amid concerns about metal demand.
“One might have expected all types of commodity producers to be in demand if inflation picks up,” said Dan Coatsworth, head of markets at AJ Bell.
“When inflation goes up, investors often seek exposure to hard assets as they tend to retain value better than financial assets in such an environment. However, miners were among the biggest losers on the market on Monday.
Rolls-Royce shares gapped down 6% on the open before recovering to trade 4% lower at the time of writing.
Oil majors BP and Shell provided some balance with gains of between 1%-2%. But this was nowhere near enough to offset losses elsewhere. BAE Systems was also higher.