Nervous financial markets were waiting to see how Israel responds to a drone and missile attack by Iran this weekend with many traders fearing a big spike in the oil price if the cycle of violence continues.
The oil price was little changed today on relief that the vast majority of the projectiles were shot down before reaching their targets. But it is up sharply from $83 just a month ago to just under $90 today, and investors worry this will hinder efforts to get inflation under control and pave the way for interest rate cuts.
Forecasters Capital Economics said: “The drone attacks by Iran on Israel mark a new and potentially significantly more dangerous phase in troubles in the region. The key risks for the global economy are whether this now escalates into a broader regional conflict, and what the response is in energy markets.
“A rise in oil prices would complicate efforts to bring inflation back to target in advanced economies, but will only have a material impact on central bank decisions if higher energy prices bleed into core inflation.”
The FTSE 100 slipped further away from the psychologically important 8000 level, down 42.24 points at 7953.34, as clients mostly sat on their hands to see what happens next.
Warren Patterson, head of commodities strategy at ING, said: “The limited damage and the fact that there was no loss of life means that maybe Israel’s response will be more measured. But clearly there is still plenty of uncertainty and it all depends on how Israel now responds.”
However, oil stocks were hit — BP fell 14p to 525p, Shell lost 46p to 2891p. Energy giant Centrica, owner of British Gas, was down 1p at 132p.
Bartosz Sawicki, market analyst at Conotoxia fintech, said: “As Israel weighs its options in the aftermath of the assault, hopes that the conflict would remain contained prevail due to limited damage and no life loss. Secondly, some escalation had been widely expected, and risk aversion rose sharply on Friday.”
That risk aversion will grow if there appears to be a direct risk to energy supplies, as there was when Russia first attacked Ukraine.
But the gold price rose 0.3% to $2349 an ounce, leaving it close to all-time highs as the most cautious investors sought safety.
Metal prices also jumped today as geopolitical uncertainties rippled around the world.
Aluminium surged by a record 10% in early trading on the London Metal Exchange before falling back slightly as traders responded to new US and UK sanctions that banned deliveries of Russian supplies produced after midnight on Friday.
The restrictions on key industrial metals — aimed at curbing President Vladimir Putin’s ability to fund his war machine — are unlikely to stop Russian sales but inject significant uncertainty into commodities markets. Nickel also rose 4%.
Russia is a major producer of nickel, aluminium and copper. On the currency markets, the dollar weakened. It was down 0.28 cent against the pound to $1.2488. Traders say sterling could be hit quite hard if economic figures this week — especially inflation on Wednesday — disappoint markets.
CPI inflation is expected to have fallen back to around 3.1% in March.
A UK rate cut as early as June, which seemed on the cards last week, now seems far from certain.
