Oil prices rise after EU agrees Russian sanctions
There is tension but not trauma as investors monitor developments in the Middle East.
With an eye on the ongoing situation, investors were, for the most part, unwilling to take positions ahead of the weekend, and markets generally drifted as a result. This reticence proved prescient as the US struck three Iranian nuclear sites on Saturday. In turn, oil took another leg higher on supply concerns, although the gains were tempered by suggestions that OPEC is well placed to turn on the supply taps should the need arise.
The next turn of events will inevitably dictate investor sentiment, with traders currently braced for retaliatory Iranian action, as well as keeping a close eye on the Strait of Hormuz, where a disruption of oil flows could follow. At the moment, the recent spike in the oil price has led to a gain of 4.8% so far this year, but perhaps of equal concern is the inflationary effect the rising level could have.
The playbook for UK markets followed an increasingly familiar path, with some strength in the oil majors offset by weakness in the airlines as both sectors reacted to the new developments. More broadly, risk was taken off the table with a general markdown, which saw some of the stronger performers, such as the banks, succumb to some selling pressure.
Even so, the relative resilience of the premier index remains in play, with marginal opening losses doing little to upset the progress made as markets enter the final full week of trading for the half-year. The FTSE 100 is ahead by 7% so far this year, quite apart from the additional 3.4% contribution which the average dividend yield makes to the total return, while even the FTSE 250 is ahead by 2.4% in spite of the additional issues overhanging the domestic economy.
Meanwhile, the escalation comes at a time when investors were already trying to price the inflationary impact of the tariff trade war, both in terms of those already in place as well as those where the 90-day suspension expires in early July. For its part, the Federal Reserve is sticking to its knitting despite Presidential pressure, opting to wait until it can assess the fallout on prices from the current inputs.
At this early point, Dow futures are currently in the red, although at a contained level with losses of up to 0.3% seeming likely after initially lower indications. This would further weigh on the progress which markets have recently made where, in the year to date, the S&P 500 and Nasdaq have added 1.5% and 0.7% respectively, although the more traditional Dow Jones has posted a 0.8% loss.
First to react to the escalation of the conflict were the markets in Asia, which posted marginal losses for the most part. There was some support for the Nikkei 225, where declines were partially offset by gains in defence stocks, where there is sizeable military manufacturing, boosting the likes of Mitsubishi Heavy Industries.