Oil rises and stock markets under pressure as Middle East conflict steps up

Investors reacting to the conflict was helping fuel a downturn in the world’s financial markets on Monday. The price of Brent crude oil shot up by around 5 per cent on Monday morning to more than 97 US dollars a barrel. Nevertheless, prices remain below the 100 dollars a barrel mark and short of the 120 dollar peak reached in April. Oil prices have eased slightly over recent weeks amid hopes of peace talks developing following a ceasefire agreement in the US-Israeli war with Iran in April.

But hopes were dashed that the conflict could be resolved after Iran launched missiles at Israel in the first strike since the fragile ceasefire, with Israel retaliating with airstrikes against Iran early on Monday.

Steep losses in Asian stock markets overnight saw Japan’s Nikkei 225 index fall by 3.8 per cent and South Korea’s Kospi index tumbling by more than 8 per cent after a sharp sell-off affecting technology stocks. This came after a bruising session on Wall Street on Friday, where the S&P 500 index fell by 2.6 per cent amid renewed concerns about inflation. European stock markets opened in the red on Monday, although losses were more modest compared with international peers.

The UK’s FTSE 100 was down about 0.3 per cent, to 10,336, in early trading, while Germany’s Dax was falling about 0.8 per cent, and France’s Cac 40 was down 0.6 per cent.

Richard Hunter, head of markets at Interactive Investor, said: “An ugly collision of the forces which have propelled markets so far this year – technology, economics and geopolitics – sent investors on a selling spree which resulted in a sharp sell-off across global markets.

“The inevitable pressure on Asian markets, which saw circuit breakers being triggered in South Korea as the index fell by more than 8% at the open, was exacerbated by news that Israel had launched airstrikes on Iran, despite earlier calls for restraint from the US president.

“Oil prices rose by more than 4 per cent as a result, further underlying the inflationary pressures which much of the world will be facing in the coming months.”

Susannah Streeter, chief investment strategist at Wealth Club, said: “The spectre of high interest rates has seen investors finally take fright, and the slide is being exacerbated by renewed Middle East conflict.

“While markets had been surprisingly stoic through the Iran war and a painful energy crunch, sentiment is now more fragile.

“Iran has fired missiles at Israel, sparking fresh worries about the inflationary impact of the war. Brent crude has risen sharply, up four per cent, trading above $97 a barrel as supplies in the region stay stranded.

“The prospect of borrowing costs staying higher for longer, if the prices stay elevated, has shattered the optimism which had pushed indices to record highs.

“There had been hopes that the US economy might stay in Goldilocks territory – not too hot and not too cold – but inflation concerns have reared up again, and the bears are back on the prowl.

“Friday’s US jobs report sparked a firestorm of selling, with big tech bearing the brunt of the wobble in confidence.

“Indices in Asia have been hit by the contagion of pessimism, with semiconductor stocks falling sharply. South Korea’s Kospi plunged more than eight per cent, triggering a market-wide circuit breaker.

“The slide looks set to continue, with Wall Street bracing for another sell-off and European indices also caught up in the downbeat sentiment.

“The FTSE 100 is also set to trade lower, as wary sentiment spreads and investors in the internationally focused index fret about the prospects for global growth.

“Markets are now pricing in a growing likelihood of a rate hike from the Fed this year, and potentially another next year. The Bank of England also looks on track to raise rates at least twice, given the repercussions of the Middle East crisis.”

Derren Nathan, head of equity research at Hargreaves Lansdown said brent crude oil prices have reversed most of last week’s falls, rising nearly five per cent to over $97 per barrel.

“The Iran crisis has entered its 100th day, and despite President Trump’s continued insistence that a deal to end the conflict and reopen oil transit routes is close, the weekend saw heavy exchanges of fire between Israel, Iran and Iranian proxy Hezbollah in Lebanon, as well as Iranian strikes against Kurdish targets in Iraq.

“US 10-year treasuries are nudging 4.6 per cent today following a blowout jobs report on Friday. Nonfarm payroll increases of 172,000 came in 100 per cent above analyst expectations, raising fears that the US economy is overheating. That’s certainly the view debt markets have taken, with yields adding around 0.2 percentage points since the report broke and odds moving in favour of a quarter-point rate hike from the Fed by October.

“However, there are some signs that the current strength in hiring is more structural than cyclical. The beat wasn’t accompanied by an acceleration in wage growth.

“Both labour market participation and unemployment were flat at 61.8 per cent and 4.3 per cent respectively, suggesting that at least some of Friday’s beat came from supply constraints rather than excess demand.

“Much of the strength came from local government and health care, both sectors which have been considered under-staffed for some time, with the latter also seeking to fill a skills shortage. Neither sector is typically driven by credit-fuelled consumer enthusiasm. The same can’t be said for leisure and hospitality, which saw the biggest hiring spree last month. In this case however, the imminent kick-off of the FIFA World Cup on Thursday is likely to be a key driver.

“Longer term, the bull hypothesis is that productivity gains from AI can support job growth. While bots may step into some roles, increased productivity, faster workflows, and new products and services could drive underlying improvements in the labour market.”