Stock markets plunge after oil surges over $100 a barrel, wiping out hopes of UK interest rate cut – business live

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Stock markets 'finally wake up' to implications of Iran war

It might be a serious mistake for central banks to respond to the oil price shock by raising interest rates.

Chris Beauchamp, chief market analyst at IG, explains:

“Stock markets have finally woken up to the implications of the Iran war, as oil hits three figures for the first time in four years. Having remained remarkably complacent last week, it looks like the rush for the exits has begun in earnest. Even high-flying defence stocks are being hit hard in London today, a sign that investors are no longer concerned about potential upside, but instead are focusing on protecting their profits, opting to sell now and sit out the volatility for the time being.”
“The morning has already seen markets begin to price in rate hikes by the ECB and the Bank of England. But that seems odd given the major hit to consumer spending that is about to make itself felt – this is a supply-driven shock, not some huge surge in demand. Policymakers may well have learned the wrong lesson from 2021, and risk setting off a much deeper recession if they get too trigger-happy on rate hikes.”

European market update: losses across the board

After an hour’s trading, European markets are still firmly in the red.

• UK’s FTSE 100: down 200 points or 1.9% at 10,087 points

• German DAX: down 548 points or 2.3% at 23,043 points

• French CAC: down 198 points or 2.5% at 7,795 points

Fears of a stagflationary shock last seen half a century ago are hitting markets today, reports Neil Wilson, investor strategist at Saxo UK:

A 1970s oil shock? Perhaps. The global economy is a lot less dependent on the price of a barrel than it was then – oil intensity has declined steadily since the 70s.

But clearly there are fears of a global economic slowdown and inflation crisis which is roiling global markets after a weekend of further escalation in the Middle East war. The 1970s crisis led to the 80s bull market – will it also create the roaring 20s bull market? For the moment, financial markets are concerned about a 1970s-style stagflation situation first.

The money markets are now predicting that UK interest rates will have risen to 4% by June 2027, up from 3.75% at present.

UK two-year bond yields on track for worst day since Liz Truss's mini-budget

Inflation fears mean UK short-term government bonds are on track for their worst day since former prime minister Liz Truss’s mini-budget roiled the markets in September 2022.

With prices tumbling this morning, the yield (or interest rate) on UK two-year bonds has jumped by as much as 37 basis points (0.37 percentage points) to 4.239%.

That, Reuters reports, puts two-year yields on course for the biggest one-day increase since Truss’s brief tenure, when plans for unfunded tax cuts and energy bill support sparked a surge in bond yields and sent the pound down to a record low.

Such a large move in two-year bond yields underlines how investors have ripped up hopes of cuts to UK interest rates.

Earlier this year, two cuts to interest rates in 2026 were expected – the market is now indicating that borrowing costs are more likely to rise this year (see earlier post).

Airline shares across Europe are sliding this morning.

IAG, the parent company of British Airways, has dropped by 4.3% this morning, adding to its losses last week.

Lufthansa are down 4.6% and Air France has lost 5.1%.

Budget airline easyJet is off 3.6% while Wizz Air has fallen by 8.3%.

UK government borrowing costs jump

Fears that the jump in the oil price will spark an inflationary surge are hurting government bonds.

With prices falling, the yield (or interest rate) on government debt is rising, sharply.

The benchmark 10-year UK bond yield is up 9.5 basis points (0.095 percentage points) to 4.756%, its highest level since early October last year.

This highlights how the crisis is putting pressure on the UK’s economy, and its public finances.

Kathleen Brooks, research director at XTB, says:

The UK is paying for natural gas than our European neighbors, so it is natural that our bond market sell off could be worse than Europe’s today.

Oil companies are among the few risers on the FTSE 100 index this morning, with Shell (+1.7%) and BP (+1.4%) benefitting from the surge in crude prices.

European stock markets hit lowest since December

Continental European stock markets have joined the global sell-off too, with

Germany’s DAX index dropped by 2.5% in early trading, France’s CAC 40 shed 2.4% and Spain’s IBEX lost 3.1%, amid alarm over the surge in oil prices.

This has pushed the pan-European Stoxx 600 index has dropped by 2% at the start of trading, to its lowest since December, Reuters reports.

FTSE 100 tumbles

The London stock market is open, and shares are tumbling.

The FTSE 100 index of blue-chip shares has dropped by 179 points or 1.75% at the start of trading to hit 10,106 points.

That looks to be its lowest level since mid-January, as the Iran war wipes out most of the gains recorded this year.

Mining stocks such as Anglo American (-6.2%) and Antofagasta (-5%) are among the fallers, along with Rolls-Royce (-5%) whose jet engine business will suffer from a slump in travel.

Research show that poorer people are hit hardest by surging oil prices.

As our economics editor Heather Stewart wrote yesterday:

Recent research published by economists at the University of Massachusetts Amherst identified energy, along with food and agriculture as among the commodities that had “a disproportionate capacity to increase inequality when their prices rise”.

Where there are benefits, these are narrowly shared. Another striking recent paper showed that after the 2022 oil price surge in the US, 50% of the windfall benefit from higher prices in the sector went to the wealthiest 1% of individuals, via the stock market. The bottom 50% of people received only 1%.

Countries who are net-importers of oil, such as the UK, are unambiguously losers from higher energy prices. More here:

Bank of England certain to leave rates on hold this month, money markets indicate

Any lingering hope that the Bank of England might cut interest rates this month have been crushed by the surge in oil prices.

The money markets indicate that there is a 99% probability that the BoE leaves rates on hold at its next meeting, on 19 March.

Before the Iran war began, a rate cut had been an 80% chance, but policymakers are now expected to wait to see how the conflict develops.

Looking further ahead, the markets indicate the Bank is more likely to raise rates than cut them this year. The money markets are pricing in 15 basis points of increases (0.015 percentage points) to Bank Rate by December.

European gas prices are surging this morning too, following the slowdown in Middle East production.

The UK month-ahead gas price has jumped by 19% to 163p a therm.

The continental European month-ahead benchmark is up 16% at €62 a Megawatt hour.

The pound is sliding against the US dollar, as investors seek out safe haven assets this morning.

Sterling has dropped by three-quarters of a cent to $1.3337.

Ray Attrill, head of FX strategy at National Australia Bank, says:

“The U.S. dollar is finding no shortage of support from traditional haven considerations and obviously, the United States’ net energy exporter status in sharp contrast to most of Europe.”

Donald Trump’s claim that the surge in the oil price is “a very small price to pay” has added to the sense that neither side is showing any signs of de-escalation, says Jim Reid, market strategist at Deutsche Bank, adding:

Another important thing from the weekend is that we saw oil infrastructure targeted by both sides. This is an escalation from last week where this was, on the whole, avoided.

Markets slump after Iran war takes 'a turn for the worse'

Optimism among some investors that the Iran conflict might end quickly has been dashed by the further escalation seen over the weekend.

Mohit Kumar, economist at investment bank Jefferies, says there had been a sense of complacency around the geopolitical impact, but now there is “some forced selling as investors reassess their positions”.

Kumar told clients that the war has “taken a turn for the worse over the weekend”:

Bombing of oil depots in Iran not only sent oil prices surging but also shows the shift in war strategy. Qatar indicated that war will force Gulf countries to stop energy exports within weeks. The attack on the desalination plant suggest that the human cost of the war is likely to increase over the coming days. Iran has confirmed Mojtaba Khamenei as its new Supreme Leader, a move that is unlikely to be acceptable to the US. Iran increased its missile attack over the weekend, though some reports suggest that it may limit its attacks on other gulf countries. FT reported that G-7 countries may discuss emergency oil reserve release to help with oil prices.

Kumar added that the choice of Mojtaba Khamenei as the new Supreme Leader shows that Iran would be willing to carry on the war further and negotiations would not be easy.

Japan considering steps to cushion economy from Iran conflict, PM Takaichi says

Japan’s prime minister has said her country will consider steps to cushion the economic blow from rising fuel costs caused by the conflict in the Middle East including curbing gasoline prices.

Prime minister Sanae Takaichi told the Tokyo parliament:

“Many people are worried about rising gasoline prices.

Taking this into account, the government has been considering since last week what steps it can take.”

“We’re considering steps to avoid gasoline prices from rising to levels intolerable for the public.”

Takaichi added that such measures could be funded by tapping reserves.

G7 to discuss joint release of emergency oil reserves; oil slips back

Oil has slipped back from its earlier highs, following a report this morning that G7 countries will discuss a potential joint release of emergency oil reserves later today.

According to the Financial Times, G7 finance ministers will hold a call at 8.30am New York time (12.30pm UK time) with the International Energy Agency to discuss the impact of the Iran war.

The FT says:

Three G7 countries, including the US, have so far expressed support for the idea, according to the people familiar with the talks. The 32 members of the IEA hold strategic reserves as part of a collective emergency system designed for oil price crises.

One person said some US officials believe a joint release in the range of 300mn-400mn barrels — 25 to 30 per cent of the 1.2bn barrels in the reserve — would be appropriate.

This has helped to cool the panic in the energy markets, somewhat. Brent crude is now trading at $106.73 a barrel, having peaked at $119.50 early this morning – but still up 15% today.

Trump: It's a very small price to pay

US president Donald Trump has claimed that the “short term” rise in the oil price is a “very small price” to pay for peace.

Posting on his Truth Social site, as the war with Iran entered its 10th day, the US president wrote:

Short term oil prices, which will drop rapidly when the destruction of the Iran nuclear threat is over, is a very small price to pay for U.S.A., and World, Safety and Peace. ONLY FOOLS WOULD THINK DIFFERENTLY!President DJT

Introduction: Oil surges over $100 a barrel in frenzied trading

Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.

Stock markets are tumbling today after the oil price surged over $100 a barrel for the first time in four years.

Crude prices rocketed last night as soon as Asia-Pacific financial markets opened for the new week, with US crude and Brent crude both nearing $120 a barrel in frenzied trading.

Oil is on track for its biggest daily jump since the turmoil of the Covid-19 pandemic, after at least five energy sites in and around Tehran were hit by strikes, prompting accounts of “apocalyptic” scenes in the Iranian capital.

Kuwait’s national oil company also announced a precautionary production cut amid retaliatory attacks by Iran, and there were reports that output from Iraqi oil production from its main southern oilfields has fallen by 70%.

With traders betting that the Middle East confict will lead to supply disruptions, the jup in the oil price is threatening an inflationary surge that would hurt economics around the world and create a new cost of living squeeze.

The stock market response has been brutal this morning. Japan’s Nikkei has plunged by almost 5% today, while South Korea’s Kospi has shed 6.5%. Australia’s S&P/ASX 200 has dropped by 2.85%.

European and US stock markets are all set for losses too.

Ipek Ozkardeskaya, senior analyst at Swissquote, says hopes for peace have waned after Mojtaba Khamenei, the second son of the late Iranian supreme leader Ayatollah Ali Khamenei, was chosen as his successor.

Ozkardeskaya says this decision that did not please the US at all, adding:

The choice suggests that Iran will not back down to the US, and that means a potentially prolonged war in the Middle East – which is home to about 50% of global oil reserves and around 40% of the world’s natural gas reserves.

About 20% of the world’s oil and LNG flows through the Strait of Hormuz, which is presently closed, making it one of the most critical energy chokepoints in the global economy.

The agenda

• 12.30pm GMT: G7 members and IEA to hold call to discuss the impact of the Iran war

• 2pm GMT: Eurozone finance ministers to hold Eurogroup meeting