Turmoil on Global Markets as Energy Prices Surge

Extreme volatility in global markets has been observed as crude oil prices soared close to £120 a barrel, prompted by fears of an energy price shock. This uptick followed claims that the conflict in the Gulf may be nearing its end, prompting a swift reversal in late trading.

On Monday, Brent crude briefly surged 29 per cent, surpassing £119 a barrel for the first time since 2022, before plummeting to below £90 after statements made by President Trump regarding the nearing conclusion of the war in Iran. This rollercoaster day saw both stocks and government bonds face significant fluctuations before staging a mid-afternoon rally.

Investors have grown increasingly anxious about the implications of the conflict in Iran on the global economy. The uncertainty surrounding the objectives of the United States and Israel complicates forecasts, leading analysts to warn that the conflict could extend for several weeks or even months.

Late on Monday, Trump asserted that the military objectives were “very far ahead of schedule,” and hinted at a possible takeover of the Strait of Hormuz, a critical maritime passage through which oil and gas shipments have been disrupted. This disruption to production and supply has rapidly increased energy costs.

At the start of trading on Monday, Brent crude surpassed £119, marking a dramatic rise from just over £70 a barrel prior to the commencement of hostilities in Iran. Analysts have noted that a nearly 50 per cent increase in oil prices within a few weeks is unprecedented and poses challenges for the market.

The impact of rising energy prices is felt across financial markets, given its potential to influence inflation and central banks’ strategies for managing interest rates. Recently, traders anticipated a possible rate cut by the Bank of England at its upcoming policy meeting. This sentiment has shifted significantly, with expectations now leaning towards rate increases later this year.

The British Chambers of Commerce projects a slowdown in global growth, lowering its forecast for 2026 to 1 per cent, down from 1.2 per cent. It also predicts that ongoing global uncertainties will push UK inflation up to 2.7 per cent, before easing slightly to 1.9 per cent in 2027.

The fluctuations in interest rates have led to a sell-off in government bonds, resulting in a spike in gilt yields. The yield on a ten-year gilt touched 4.78 per cent early in the day, its highest since October, while the two-year yield surpassed 4.23 per cent for the first time in a year. Yield levels later calmed, with the two-year yield closing at 4 per cent and the ten-year yield stabilising at around 4.66 per cent.

The FTSE 100 initially opened nearly 2 per cent down but managed to recover most of its losses by the close, ending only 0.3 per cent lower. Although the index has dropped 6 per cent since late February, it remains 3 per cent above its starting point for 2026. Companies sensitive to interest rate shifts, particularly in the commercial property sector, have faced the most significant impacts.

Shares in travel sectors also continued to struggle, following previous declines. In contrast, London’s oil companies witnessed gains as energy prices surged, with BP shares increasing by 2.2 per cent and Shell rising by 2.4 per cent to reach record highs.

As uncertainties linger, the increased demand for the safety of the US dollar has strengthened its value while exerting downward pressure on gold, which fell to approximately £5,110 per ounce.