Oil prices jump 3.5%, European shares fall on Middle East escalation
Oil prices jumped as much as 3.5% and European shares have opened lower, as escalating tensions between the US and Iran spoked investors.
Brent crude has risen through $86 a barrel, and is currently up 3.4% at $86.15 a barrel, after the US carried out a third night of military strikes against Iran and Donald Trump announced a blockade of Iranian shipping and a 20% fee on cargo transiting the strait of Hormuz.
The US president said the passage would stay open “with or without Iran” but that the US would start charging fees on ships transiting through the waterway, in an apparent policy reversal. A 20% fee would be levied “for any and all costs necessary” to provide security and safety for vessels.
The FTSE 100 index in London is down 0.5%, or 52 points, at 10,445. The German Dax has dropped 0.55%, the French CAC lost 0.9%, the Italian borsa declined 0.7% and the Spanish Ibex tumbled 1.07%.
BP has topped the FTSE 100 with a 3% gain, while Shell shares are 1.7% ahead, after a trading update from BP.
BP said net debt at the end of the second quarter is expected to fall to between $22bn and $23bn, from $25.3bn in the first quarter. It also expects its second quarter oil trading result to be “slightly higher” compared with the first quarter.
Victoria Scholar, head of investment at the trading platform interactive investor, said:
That’s even after an extremely strong period for oil trading last quarter when the Iran war fuelled energy shock supercharged earnings which more than doubled year-on-year.
It appears that the Middle East uncertainty is here to stay at least for now after the US said it will reimpose a naval blockade on Iran, reversing course after last month’s steps towards a peace deal with Iran. Ongoing higher oil prices are supportive of BP’s share price as well as its earnings in the near-term, but the company’s outlook is highly vulnerable to developments in the Iran conflict beyond its control.
Key events
Bailey says resumption of Middle East attacks underline instability risks; gilt yields jump
Bailey said Britain’s banking system is resilient, but he is concerned about the impact on financial stability from the escalating tensions between the US and Iran in recent days.
Bailey said last month, when he voted with the 7-2 majority on the monetary policy committee to keep interest rates unchanged, he thought that risks from the US-Israeli war on Iran were around the lower end of the central bank’s three scenarios.
He told MPs on the Treasury select committee:
But I would have added the very strong caveat to that it seems to me that the situation remained unstable, and the ceasefire was fragile.
He said he now thinks the breakdown of peace talks and resumption of attacks underline instability risks.
UK government bond yields have risen to their highest level since May as oil prices jumped more than 4% to a four-week high, reigniting inflation fears. Investors also ramped up their bets on interest rate hikes by the Bank of England, fully pricing in a quarter-point increase by September.
The yield (or interest rate) on the 10-year gilt rose 5 basis points to 5.02%, raising the cost of government borrowing and underlining the challenges faced by prime minister in waiting Andy Burnham.
The yield on the two-year gilt, which is particularly sensitive to interest rate expectations, jumped 8bps to hit a high of 4.45%, the highest since 19 May.
Asked whether the next change in Britain’s prime minister would affect financial stability, Bailey declined to comment on politics but said the UK outlook is backed by the government’s fiscal framework as well as monetary policy set by the Bank.
Bank of England governor: ‘Big issue’ for UK is slow economic growth
The governor of the Bank of England’s key message to Andy Burnham’s incoming government is that the “big issue” for the UK is slow economic growth.
Andrew Bailey told the Treasury committee:
The overall message I would give is that I think the big issue is growth in the economy.
I do actually think that there are signs of a very resilient financial system.
What I think is much more challenging is we’ve had low growth in the economy now for the best part of 16 to 17 years.
So this is not a story about any one government… but I think it’s important because a critical structural issue.
But he stressed: “We will not get growth if we don’t have financial stability,” when asked whether regulation in the financial system may be holding back growth.
Bank of England rate hike expectations rise
Expectations of an interest rate hike from the Bank of England and European Central Bank have increased after the fresh surge in oil prices revived inflation fears.
For the first time in a month, financial markets are fully pricing in a quarter-point UK rate rise by September, likely followed by another one by the end of the year.
Traders also expect the ECB to raise rates by a quarter point in September, and another hike by the end of December.
The shift comes as escalating US-Iran tensions push Brent crude prices closer to $90 a barrel. At the start of the month, swaps priced less than a quarter-point hike for the Bank of England and ECB, when a shaky ceasefire was in place between the US and Iran.
However, US military strikes on Iran, and Donald Trump’s reimposition of a blockade on Iranian ships transiting the strait of Hormuz and a 20% fee for all other cargo has brought new turmoil to markets.
Gas prices rise to three-month highs as Middle East tensions ratchet higher
Gas prices have risen to three-month highs, as tensions between the US and Iran ratchet higher.
The Dutch natural gas contract for August delivery, the European benchmark, rose nearly 3% to €52.8 per megawatt hour, the highest since early April.
The UK natural gas contract for August delivery climbed 3.3% to 128.27p per therm, the highest level in more than three months.
AJ Bell head of markets Dan Coatsworth said:
Investors feel like they’ve hit rewind on a movie they didn’t enjoy first time round. The ability to get shipping through the strait of Hormuz is once again compromised thanks to the renewed tensions between Tehran and Washington.
For now, investors seem to be retaining a measure of calm and hoping a path towards a resolution in the Middle East can still be found. The longer the current situation persists though, the more likely market sentiment takes a more serious hit.
The UK market fared better than most other parts of Europe thanks to its heavy exposure to the energy sector through BP and Shell.
Stocks with exposure to the travel sector along with retailers and housebuilders were among those to take a step back as investors weighed up the implications of potentially higher inflation and interest rates.
Oil prices jump 3.5%, European shares fall on Middle East escalation
Oil prices jumped as much as 3.5% and European shares have opened lower, as escalating tensions between the US and Iran spoked investors.
Brent crude has risen through $86 a barrel, and is currently up 3.4% at $86.15 a barrel, after the US carried out a third night of military strikes against Iran and Donald Trump announced a blockade of Iranian shipping and a 20% fee on cargo transiting the strait of Hormuz.
The US president said the passage would stay open “with or without Iran” but that the US would start charging fees on ships transiting through the waterway, in an apparent policy reversal. A 20% fee would be levied “for any and all costs necessary” to provide security and safety for vessels.
The FTSE 100 index in London is down 0.5%, or 52 points, at 10,445. The German Dax has dropped 0.55%, the French CAC lost 0.9%, the Italian borsa declined 0.7% and the Spanish Ibex tumbled 1.07%.
BP has topped the FTSE 100 with a 3% gain, while Shell shares are 1.7% ahead, after a trading update from BP.
BP said net debt at the end of the second quarter is expected to fall to between $22bn and $23bn, from $25.3bn in the first quarter. It also expects its second quarter oil trading result to be “slightly higher” compared with the first quarter.
Victoria Scholar, head of investment at the trading platform interactive investor, said:
That’s even after an extremely strong period for oil trading last quarter when the Iran war fuelled energy shock supercharged earnings which more than doubled year-on-year.
It appears that the Middle East uncertainty is here to stay at least for now after the US said it will reimpose a naval blockade on Iran, reversing course after last month’s steps towards a peace deal with Iran. Ongoing higher oil prices are supportive of BP’s share price as well as its earnings in the near-term, but the company’s outlook is highly vulnerable to developments in the Iran conflict beyond its control.
The oil price is now up more than 3% at $85.89 a barrel.
It is the first time Brent crude has risen through $85 since the US and Iran announced their ceasefire.
China’s car exports rose to a record 1m cars in June as part of the wider surge in trade, which could lead to more tensions with European and other trading partners.
Shipments of cars jumped 71.2% in June from a year earlier to 1.06m, according to the Chinese customs data.
This puts China on track to export more than 10m cars this year, up from 7.1m last year and more than double the 4.9m sold abroad in 2023, the Financial Times said.
Sales within China have slowed sharply after Beijing phased out electric vehicle subsidies and as demand for petrol and diesel cars has fallen.
The surge in Chinese exports has prompted the EU and others to slap steep tariffs on car imports from the country.
China’s imports of crude oil slumped 41.3% to their lowest in almost a decade in June, as refinery run rates hit a ten-year low due to weak domestic demand and export curbs on refined oil products to safeguard energy security amid the Iran war.
China imported 29.27m tonnes of crude oil in June, or 7.12m barrels a day, the lowest since October 2016.
Introduction: Oil prices rise over 2% after Middle East strikes; China’s exports surge on back of AI boom
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
Oil prices rose more than 2% after the conflict in the Middle East worsened, with the US carrying out a third consecutive night of strikes against Iran. Two tankers came under fire in the strait of Hormuz.
Brent crude, the global benchmark, climbed 2.2% to $85.15 a barrel, after touching $85.64 in early London trading.
Donald Trump said the US would reinstate its blockade of Iranian shipping in the Gulf, but vowed that the strait would remain open, “with or without Iran”.
Susannah Streeter, chief investment strategist at the Wealth Club, said:
Stasis has taken over markets as investors wait for the latest twist in the Iran conflict and brace for higher energy prices to filter through to economies. Brent crude has surged even higher, topping $84 a barrel, while European gas prices have shot up to levels not seen in three months.
There was a surge in China’s exports last month, lifted by orders for chips and computing power to feed the global AI boom.
Exports climbed 27% from a year earlier measured in US dollars, the biggest rise in four months, according to Chinese customs data. They outpaced May’s 19.4% gain and the 18.2% increase forecast by economists.
This means China is likely to post a trade surplus above $1 trillion for a second year, despite slowing growth in major economies and trade frictions with Washington. It is heavily reliant on export sales, to make up for sluggish domestic demand amid a prolonged property crisis.
Imports jumped 36% following May’s 27.4% gain, marking a five-year high. Economists had forecast growth of 24% for June. China posted a trade surplus of $125.6bn in June, up from $105.4bn in May.
The surge in global AI investment is offsetting the export hit from the war in the Middle East.
Xu Tianchen, a senior economist at the Economist Intelligence Unit in Beijing, said:
Continued export strength, mostly driven by AI, points to a better second half, coupled with a more expansionary policy mix, accelerated fiscal spending and mild monetary easing, as well as a de-escalation of the situation in the Middle East, which will benefit China through lower oil prices.
But domestic demand remains a drag. Retail sales remain pretty flat and fixed asset investment was negative last month.
Annual exports accounted for 24% of total manufacturing sales over the first four months of this year, according to a recent report by Gavekal Dragonomics, a consultancy, the highest level since China’s accession to the World Trade Organization in 2001. In 2019, the ratio stood at 18.3%, and rose to 22.3% last year. The report said:
That would be considered high for a small export-focused country; for the world’s second-largest economy, it is remarkable.
Zhiwei Zhang, chief economist at Pinpoint Asset Management, told Reuters:
I think exports will remain strong in the second half of the year. Meanwhile, it also puts further pressure on the trade tensions between China and its trading partners, Europe in particular.
Analysts noted that surging semiconductor prices are pushing up import as well as export values.
Imports from South Korea, a major chip manufacturer, rose 85% last month, while purchases from Taiwan, another big semiconductor manufacturer, climbed 41.1% over the same period.
Customs vice minister Wang Jun said he was confident that exports would be resilient into the second half of the year led by technology, despite external pressures.
The Agenda
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9am BST: Bank of England governor Andrew Bailey speaks at Treasury committee
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1.30pm BST: US inflation for June (previous: 4.2%; forecast: 3.8%)
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3pm BST: US Federal Reserve chair Kevin Warsh testifies
