Susannah Streeter, Chief Investment Strategist: ''The shock at the resumption of attacks in the Middle East has started to ease off, but investors are skittish, with early gains evaporating on the FTSE 100. The blue-chip index initially clawed back some ground in early trade before sentiment turned wary again.
Investors are assessing the likely outcome of the latest round of military action, with both Iran and the US hitting targets in the region. While President Trump has declared the ceasefire to be over, he’s already been heard talking on Air Force One about the prospect of a deal and whether he’s inclined to talk to Iran. It already seems that a door may be opening to fresh negotiations, even though both sides continue to talk tough. Oil prices have retreated slightly, with Brent crude hovering around $77 a barrel, down from above $80 yesterday.
Mining stocks have rebounded, with gold and silver producers benefiting as easing oil prices have taken some of the edge off inflation worries and helped push the dollar lower. A cheaper greenback makes commodities priced in the currency, such as precious metals, more attractive to international buyers.
However, deep unpredictability still lingers following this major setback to peace hopes. Investors are wary that the calm may prove short-lived. If energy prices start climbing again, higher costs would rapidly ripple through businesses across multiple sectors, while pricier fuel would eat into household budgets and encourage more cautious consumer spending.
UK gilt yields have retreated very slightly but still remain highly elevated, above 4.9%, the highest level since 10 June. The Middle East escalation comes as investors are also weighing the political uncertainty surrounding the prospect of a Burnham premiership and what it could mean for tax and spending plans. With so many moving parts, investors are demanding a bigger premium to lend to the UK, and gilt yields look set to remain sensitive to every fresh political and geopolitical twist."
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