The ongoing conflict between the US, Israel, and Iran has sent shockwaves through global markets, causing oil prices to rise and prompting fears of a prolonged disruption to shipping in the Strait of Hormuz. As reported by The Guardian, the situation has led to a significant increase in oil prices, with Brent crude up 8.4% in the current session.
Kathleen Brooks, research director at XTB, notes that sovereign bonds have sold off sharply, with 10-year Gilt yields higher by 6 basis points in the UK, 7 basis points in France, and 8 basis points in Italy. This trend is also observed in the US, with Treasury yields higher by 8 basis points, and Canada facing sharply higher yields. Brooks attributes this to fears of a large spike in energy prices causing another wave of inflation around the world.
The UK's FTSE 100 share index has fallen 1.6%, or 172 points, to 10,738, its biggest one-day fall since April 2025. Germany's DAX index is down 2.7%, France's CAC 40 has lost 2.2%, and Italy's FTSE MIB has fallen by 2.4%. The chance of a cut to UK interest rates later this month has tumbled, with a quarter-point cut now seen as just a 48% chance, down from 80% last week.
Impact on Energy Markets
European natural gas prices have surged, with the Dutch day-ahead gas contract up 39% today at €44.5 per megawatt hour (MWh). Chris Beauchamp, chief market analyst at IG, warns that this huge bounce in European natural gas prices threatens to upset the more positive outlook for UK inflation and consumer spending. Neil Wilson, investor strategist at Saxo UK, fears that QatarEnergy's move to halt LNG production could bring potentially huge disruption for European energy flows.
Qatar is a top three LNG exporter, controlling roughly a quarter of expected supply over the next decade. The shutdown of its LNG production has raised fears of shortages, with European gas prices soaring. The European benchmark contract is up around 40% today, and Wilson notes that if LNG to Europe is effectively shut via Hormuz for a prolonged period, it could lead to chaos on this contract.
Central Bank Response
Alan Taylor, a member of the Bank of England's monetary policy committee, has said that the central bank should not raise interest rates to contain a spike in energy prices. Taylor argues that energy price shocks move faster than inflation-targeting central banks can respond, and that no amount of tweaking in central bank mandates will fully insulate the economy from these external risks.
Taylor is concerned that interest rates may need to remain high if the UK cannot recover its productivity mojo. Without a rise in productivity, there will be little scope for wage rises without causing inflation to increase, he says. However, this is a separate issue from the rise in oil and gas prices, which the UK central bank can do little about.
Metals Prices
Industrial metals prices have been slower to react to global events, but aluminium prices have risen to their highest in more than a month on concerns that the region, a major producer of the metal, will suffer from a prolonged war. The benchmark aluminium price on the London Metal Exchange was up 3.1% at $3,236 a metric ton.
Neil Welsh at Britannia Global Markets notes that base metals are largely higher, with aluminium climbing on concerns that a critical supply route for Middle Eastern producers will be disrupted by conflict in the region. Increases in metals prices are expected to reverse should the war become protracted and result in a rise in energy prices that in turn hit global growth.
Investor Sentiment
The gold price was up 3% in early trading to £5,405.90, which Ross Norman, the chief executive of Metals Daily, says is an indication that traders view the current conflict in the Middle East as a strong, but limited event so far. Norman notes that gold is a safe haven asset, but there is a caveat to today's rise, which is that event-driven rallies rarely last.
Silver prices on international markets also increased, though by a more muted 1.7% at $95.36 per ounce. As investors continue to watch developments in the region, it remains to be seen how the conflict will impact global markets and investor sentiment in the coming days and weeks.
