Introduction: Oil surges over $100 a barrel in frenzied trading<\/p>\n
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.<\/p>\n
Stock markets are tumbling today after the oil price surged over $100 a barrel for the first time in four years.<\/p>\n
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.<\/p>\n
Oil is on track for its biggest daily jump since the turmoil of the Covid-19 pandemic, after at least five energy sites<\/a> in and around Tehran were hit by strikes, prompting accounts of \u201capocalyptic\u201d scenes<\/a> in the Iranian capital.<\/p>\n Kuwait\u2019s 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%.<\/p>\n 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.<\/p>\n The stock market response has been brutal this morning. Japan\u2019s Nikkei has plunged by almost 5% today, while South Korea\u2019s Kospi has shed 6.5%. Australia\u2019s S&P\/ASX 200 has dropped by 2.85%.<\/p>\n European and US stock markets are all set for losses too.<\/p>\n 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<\/a>, was chosen as his successor.<\/p>\n Ozkardeskaya says this decision that did not please the US at all, adding:<\/p>\n double quotation markThe choice suggests that Iran will not back down to the US, and that means a potentially prolonged war in the Middle East \u2013 which is home to about 50% of global oil reserves and around 40% of the world\u2019s natural gas reserves.<\/p>\n About 20% of the world\u2019s 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.<\/p>\n The agendaShare<\/a><\/p>\n Updated at\u00a003.11 EDT<\/p>\n Key events<\/p>\n Show key events only<\/p>\n Please turn on JavaScript to use this feature<\/p>\n The jump in the oil price could add half a percentage point to UK inflation within the next three months, says Professor Costas Milas, of the Management School at University of Liverpool:<\/p>\n double quotation markAn oil price of $100 is more like a psychological threshold. What is more appropriate for inflation pressures is how much oil moves relative to its two-year Moving Average [see plot below].<\/p>\n Latest estimates, based on my LSE Business Review blog<\/a> (which estimates the impact of oil price movements in addition to other drivers of inflation such as interest rate effects) suggests that the latest oil price pressures could add up to 0.52 percentage points to UK inflation within the next three months…<\/p>\n Photograph: Professor Costas MilasShare<\/a>Stock markets ‘finally wake up’ to implications of Iran war<\/p>\n It might be a serious mistake for central banks to respond to the oil price shock by raising interest rates.<\/p>\n Chris Beauchamp, chief market analyst at IG, explains:<\/p>\n double quotation mark\u201cStock 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.\u201d Share<\/a>European market update: losses across the board<\/p>\n After an hour\u2019s trading, European markets are still firmly in the red.<\/p>\n UK\u2019s FTSE<\/a> 100: down 200 points or 1.9% at 10,087 points<\/p>\n German DAX: down 548 points or 2.3% at 23,043 points<\/p>\n French CAC: down 198 points or 2.5% at 7,795 points<\/p>\n Fears of a stagflationary shock last seen half a century ago are hitting markets today, reports Neil Wilson, investor strategist at Saxo UK:<\/p>\n double quotation markA 1970s oil shock? Perhaps. The global economy is a lot less dependent on the price of a barrel than it was then \u2013 oil intensity has declined steadily since the 70s.<\/p>\n 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 \u2013 will it also create the roaring 20s bull market? For the moment, financial markets are concerned about a 1970s-style stagflation situation first.<\/p>\n Share<\/a><\/p>\n The money markets are now predicting that UK interest rates will have risen to 4% by June 2027, up from 3.75% at present.<\/p>\n Share<\/a>UK two-year bond yields on track for worst day since Liz Truss’s mini-budget<\/p>\n Inflation fears mean UK short-term government bonds are on track for their worst day since former prime minister Liz Truss\u2019s mini-budget roiled the markets in September 2022.<\/p>\n 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%.<\/p>\n That, Reuters reports, puts two-year yields on course for the biggest one-day increase since Truss\u2019s 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.<\/p>\n Such a large move in two-year bond yields underlines how investors have ripped up hopes of cuts to UK interest rates.<\/p>\n Earlier this year, two cuts to interest rates in 2026 were expected \u2013 the market is now indicating that borrowing costs are more likely to rise this year (see earlier post<\/a>).<\/p>\n Share<\/a><\/p>\n Airline shares across Europe are sliding this morning.<\/p>\n IAG, the parent company of British Airways, has dropped by 4.3% this morning, adding to its losses last week.<\/p>\n Lufthansa are down 4.6% and Air France has lost 5.1%.<\/p>\n Budget airline easyJet is off 3.6% while Wizz Air has fallen by 8.3%.<\/p>\n Share<\/a>UK government borrowing costs jump<\/p>\n Fears that the jump in the oil price will spark an inflationary surge are hurting government bonds.<\/p>\n With prices falling, the yield (or interest rate) on government debt is rising, sharply.<\/p>\n 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.<\/p>\n This highlights how the crisis is putting pressure on the UK\u2019s economy, and its public finances.<\/p>\n Kathleen Brooks, research director at XTB, says:<\/p>\n double quotation markThe 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\u2019s today.<\/p>\n Share<\/a><\/p>\n Updated at\u00a004.29 EDT<\/p>\n 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.<\/p>\n Share<\/a>European stock markets hit lowest since December<\/p>\n Continental European stock markets have joined the global sell-off too, with<\/p>\n Germany\u2019s DAX index dropped by 2.5% in early trading, France\u2019s CAC 40 shed 2.4% and Spain\u2019s IBEX lost 3.1%, amid alarm over the surge in oil prices.<\/p>\n 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.<\/p>\n
\u201cThe 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 \u2013 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.\u201d<\/p>\n