Oil and gas prices surged on Tuesday following a third night of US military strikes against Iran, before stabilizing after President Donald Trump abandoned plans for a 20% levy on cargo passing through the Strait of Hormuz.
Market swings
Brent crude, the international benchmark, initially rose 4.6% to $87.08 a barrel, its highest in over a month, before settling about 1% higher. The volatility came after Trump stated the strait would remain open "with or without Iran" but proposed a 20% charge on transiting ships to cover security costs.
European natural gas prices also climbed, with the Dutch August contract up nearly 3% to €52.8 per megawatt hour, the highest since early April. The UK August gas contract rose 3.3% to 129.4p per therm, a three-month high.
Interest rate expectations
Fears of higher inflation from rising oil prices increased expectations of interest rate hikes by the Bank of England and European Central Bank. For the first time in a month, financial markets priced in a quarter-point UK rate rise by September, with another by year-end. Traders also forecast a quarter-point ECB hike in September and another by December. At the start of the month, swaps had priced less than a quarter-point rise for both central banks amid a fragile ceasefire.
UK government bond yields rose to their highest since May, with the 10-year gilt briefly exceeding 5% before falling to 4.97%.
Stock market reaction
The FTSE 100 slipped 0.4% in early trading despite gains in BP and Shell, up 2.4% and 1.7% respectively, before recovering after Trump ditched the fee plan. The Stoxx Europe 600 dropped 0.5% initially but ended slightly up. Asian markets were mixed, with South Korea's Kospi and Japan's Nikkei 225 rising 0.7%, and China's Shanghai Composite up 1.4%.
