Oil Surges Above $95 as FTSE Futures Fall

Summary

Brent crude surged above $95 as renewed fighting between the US and Iran intensified inflation concerns and pressure on global markets. FTSE 100 futures fell in early trading, while S&P 500 futures edged lower following sharp declines across Asian equities. The New Zealand dollar dropped to $0.58375 after the Reserve Bank of New Zealand raised rates by 25 basis points but delivered a more dovish policy statement.

Equities

The FTSE 100 closed 0.32% lower at 10,789 points on Tuesday, falling to a two-week low as UK government bond yields climbed. The more domestically focused FTSE 250 dropped 1.67%, marking its biggest one-day fall since March, while the UK 10-year gilt yield reached its highest level since 2008.

Financial stocks were among the main fallers on Tuesday as investors increased expectations for further Bank of England interest rate increases this year. Barclays closed 2.1% lower, Aberdeen fell 2.86% and Prudential declined 1.7%, while housing goods and home construction stocks dropped 2.3%. Precious metal miners fell 5.4% as bullion prices declined.

Reckitt Benckiser rose 4.4% on Tuesday after a US jury ruled in the company’s favour in a trial concerning claims that its products for premature babies could cause a deadly bowel disease. BP climbed 5.2% and Shell gained 2.6% as crude oil prices rose, while Bodycote jumped 4.6% after US private equity firm Veritas Capital agreed to acquire the thermal processing company for £1.85 billion.

Oxford BioMedica was the largest UK company faller highlighted on Tuesday, tumbling 14.7%. The decline followed decisions by Novartis and Bristol-Myers Squibb, both of which have ties with Oxford BioMedica, to pause clinical trials of CAR-T treatments for autoimmune disorders.

In the US, all three major Wall Street indices closed lower on Tuesday. The Dow Jones Industrial Average fell 0.79% to 52,766.93, the S&P 500 dropped 0.71% to 7,631.47 and the Nasdaq Composite declined 1.03% to 26,099.77.

Technology stocks were particularly weak during Tuesday’s session, with the Philadelphia Semiconductor Index falling 2.1% as every constituent closed lower. The Dow Jones Transportation Average dropped 2.5%, while energy was the strongest of the S&P 500’s 11 major sectors as crude prices increased and consumer discretionary recorded the largest sector decline.

Forex & Commodities

The US dollar held close to a two-week high early this morning, with the dollar index rising to 99.79. The euro weakened to $1.158 and sterling slipped to $1.350, its lowest level since 14 August, while the Japanese yen traded at 160.2 per dollar despite expectations for a Bank of Japan interest rate increase this month. The Australian dollar also weakened to $0.7133, while the New Zealand dollar fell to $0.5844 after the Reserve Bank of New Zealand raised its official cash rate by 25 basis points to 2.75%, with the decision viewed as less hawkish than expected.

Expectations for a Federal Reserve rate increase strengthened early this morning despite weaker-than-expected US job openings and manufacturing data released overnight. Markets were pricing a 68% probability of a September increase, up from around 40% a week earlier, following Chair Kevin Warsh’s recent indication that rates may need to rise.

Spot gold fell early this morning to $4,303 an ounce, its lowest level since 7 August and its fourth consecutive session of losses. Higher US Treasury yields and stronger expectations for tighter Federal Reserve policy weighed on gold, with investors awaiting further US employment data ahead of the Fed’s September meeting.

Oil prices extended Tuesday’s sharp rise early this morning as renewed US-Iran strikes increased concerns about disruption to supplies through the Strait of Hormuz. Brent crude rose to $95.40 a barrel and US West Texas Intermediate climbed to $90.66, after both contracts gained more than $4 on Tuesday. The latest escalation has renewed concerns over oil flows through the Strait after Iran said the US attacks would lead to further restrictions on traffic through the key waterway.