The persistence of high oil prices and elusiveness of a deal between Iran and the United States has injected a fresh dose of volatility into markets.
Friday saw a sharp-sell off across global equities and bond as investors went risk off in the face of rising fears oil prices may not return to pre-Iran war levels anytime soon.
The feed-through from oil at well above $100 per barrel to inflation and the implications for interest rates were the driving force behind the selling at the end of last week, and the continued pressure on asset prices as this week begins.
The FTSE 100 opened with a dip, but has since returned to very near where it started the morning, up 0.12% to 10,206 points.
The UK-specific risks are more evident in the domestic facing FTSE 250, which is down 0.56% to 22,470.
Gilt yields are also showing the strain as political uncertainty over the expected ejection of Keir Starmer from Downing Street adds to inflation fears. It now appears a matter of when, not if, a Labour leadership election will be called.
The 10-year remains uncomfortably high at 5.15%, while the 30-year is at 5.82%. The pound has stabilised after Friday’s sharp dip, edging up 0.3% to $1.336.
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Dan Coatsworth, head of markets at AJ Bell, said: “After finishing the previous week with heavy losses, the FTSE 100 made an uncertain start on Monday as the list of market worries continues to build.
“Hopes that a resolution between the US and Iran might be in sight continue to ebb away and that’s reflected in oil prices ticking higher. Meanwhile movements in government bonds imply a lasting and potentially worsening inflationary impact from the crisis.
“Gilts have been extra volatile thanks to the domestic political situation in the UK on top of inflation worries. A by-election in Makerfield in around a month’s time looks set to mark the next staging post in a leadership race for the governing Labour Party.
“It could mean weeks of speculation about the different approaches the various runners and riders might take to the economy,” he continued. “This situation is unlikely to calm the nerves of bond traders.
“Weak Chinese economic data adds to a cocktail of worries which is difficult for investors to swallow.”
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Susannah Streeter, chief investment strategist at Wealth Club, said: “There’s a downbeat mood at the start of the week as worries about a global energy crunch collide with fresh instability on the UK political scene.
“The FTSE 100 has opened on the back foot and has struggled to gain ground, with little sign of optimism to provide any lift from its recent doldrums.
“Sentiment is also being dragged lower by signs of weakness in China as retail sales slowed sharply in April and industrial production also decelerated. This snapshot of slower demand in the world’s second-largest economy is weighing down mining stocks.
“Brent crude, the benchmark, has raced above $111 a barrel, as fears of a fresh escalation in the Iran conflict take hold,” Streeter continued. “Hopes of any kind of fast resolution have faded as Tehran and Washington appear poles apart in their demands.
“There had been some expectation that talks in China between Trump and Xi Jinping might help prompt a breakthrough, but that has not materialised.”
Derren Nathan, head of equity research at Hargreaves Lansdown, added: “After a weekend of drone strikes on energy infrastructure in the Middle East and Russia, Asia-Pacific equity markets have started the week in the red.
“Since the Iran conflict began, concerns about energy supplies have been especially acute in the Far East, which is heavily dependent on oil imports.
“But the prospect of a prolonged period of elevated oil prices is weighing more broadly this morning, with futures pointing to a weak open for European markets, the FTSE 100 and, later on, Wall Street.”
