Oil Surges as Middle East War Rattles S&P 500

Oil surged sharply as escalating conflict involving Iran, Israel and Hezbollah disrupted shipping, aviation and regional business activity, unsettling the S&P 500 and global equities. US and European stock futures attempted a rebound while Asian markets headed for their steepest weekly decline in years as investors reacted to energy-driven inflation risks. Bond yields climbed as traders priced in more hawkish central bank expectations. Oil is on track for its biggest weekly gain since the 2022 Russia-Ukraine invasion.

Equities

The FTSE 100 closed 1.5% lower on Thursday, finishing at a three-week low as government bond yields climbed and investors reassessed expectations for Bank of England interest-rate cuts. Markets are now pricing roughly a one-in-four chance of a rate reduction this month, down sharply from expectations of around 80% a week earlier. The FTSE 250 also declined, ending the session 0.9% lower.

Shares in BP closed about 2% higher on Thursday while Shell also rose by roughly 2%. In contrast, airline stocks came under heavy pressure as higher operating costs threatened profitability. Wizz Air closed 11.3% lower after warning that the conflict with Iran could reduce its net profit by around €50 million. EasyJet ended the day 5% lower and British Airways owner IAG fell 3.6%.

Several other UK companies also faced sharp declines. Shares in Reckitt dropped 5.8% after the consumer goods group said trading conditions in Europe were likely to remain challenging. Recruitment firm PageGroup tumbled 15% after reporting a steep fall in annual profit, cutting its dividend and warning that the outlook for hiring activity remains uncertain. Housebuilder Taylor Wimpey slipped 1.3% after signalling that profits are likely to decline this year as rising construction costs and softer pricing weigh on margins. In contrast, pest control specialist Rentokil closed 10.7% higher after reporting a rise in annual adjusted pre-tax profit.

In the United States, Wall Street also closed lower on Thursday. The Dow Jones Industrial Average fell 1.61% to 47,954.74, the S&P 500 declined 0.56% to 6,830.71 and the Nasdaq Composite closed 0.26% lower at 22,748.99.

Among individual US companies, Chevron closed 3.9% higher. Semiconductor group Broadcom rose 4.8% after forecasting that revenue from its artificial intelligence chips could exceed $100 billion next year.

Airline stocks in the United States also declined, with the S&P 500 passenger airlines index dropping more than 5%. Southwest Airlines ended the session 6.9% lower. Major banks weighed on the Dow as JPMorgan Chase and Goldman Sachs both moved lower during Thursday’s trading session.

Forex & Commodities

The US dollar remained firm in Asian trading early on Friday and is heading for its strongest weekly performance in more than a year as investors continued to favour safer assets amid escalating conflict in the Middle East. The dollar index held close to 99.03, maintaining most of the week’s advance. The euro traded near $1.161 while the Japanese yen weakened to around 157.8 per dollar. Sterling edged slightly higher to about $1.336 against the greenback.

Demand for the dollar strengthened after US and Israeli air strikes on Iran intensified the conflict, which has since triggered retaliatory attacks across the region. Analysts say the continued disruption is reinforcing expectations that US interest rates will remain elevated for longer. Market pricing now points to the Federal Reserve delaying its next rate cut until around September or October. Expectations for Bank of England easing have also been pushed back, while traders have started to price in the possibility of a European Central Bank rate increase later this year.

Gold prices rebounded early on Friday as investors sought safe-haven assets amid the geopolitical uncertainty. Spot gold traded around $5,117 per ounce after falling sharply in the previous session and remains near record levels reached earlier this year. The metal has still declined over the week as rising energy costs fuel concerns that inflation could remain persistent, reducing the likelihood of near-term rate cuts.

Oil prices are also set for a dramatic weekly rise after the conflict disrupted supply routes in the Middle East. Brent crude traded around $84.88 per barrel early on Friday, while US West Texas Intermediate hovered near $60.40. Prices surged earlier in the week after Iran halted tanker movements through the Strait of Hormuz, a key shipping route responsible for roughly one-fifth of global oil supply.