FTSE 100 slips as crude prices rise amid Middle East uncertainty

Susannah Streeter, chief investment strategist at Wealth Club, said: “The FTSE 100 has slipped back in a sigh of disappointment at the start of the month as a long-term solution to the Iran conflict appears elusive. Crude moves remain the big gauge of sentiment tied to hopes for peace in the Middle East. Brent crude futures nudged 94 dollars per barrel, partly reversing steep losses as uncertainty crept back into negotiations. A familiar pattern has emerged – reports of progress on a draft deal swiftly followed by fresh military skirmishes.

“American forces attacked Iranian military sites earlier, and Tehran retaliated with missile and drone attacks on targets in Kuwait. Energy markets are likely to remain skittish amid this unpredictable backdrop. Compared to pre-conflict levels, prices are still highly elevated given the severe disruption to supplies and expectations that it could take well into next year to repair the bulk of the damage to facilities. However, crude remains sharply lower on the month, down 18% from the spikes in early May, amid expectations that some form of resolution will eventually be reached and a wider regional escalation avoided.

“Hopes for progress, albeit faltering, towards a peace deal have helped calm jitters in the bond markets. UK 10-year gilt yields are hovering under 4.8% at the start of the month, close to their lowest level since mid-April. While the leadership challenge saga rumbles on in the UK, recent remarks from potential frontrunner Andy Burnham advocating fiscal restraint have helped soothe concerns about the public finances.

“Recent economic readings also indicate the economy is becoming increasingly fragile. This is fuelling expectations that the Bank of England will adopt a more cautious approach to monetary policy. Expectations for multiple hikes have been pared back, with two, not three, now priced in this year, and even if rates are pushed higher in the short-term, markets expect a cut to arrive in the spring.”