UK markets were positive this week, with the FTSE 100 Index rising 3.2% to trade at 10,340 points at the time of writing.
The Bank of England has warned that the economic shock from the Middle East conflict is intensifying the risk to the financial system, exposing numerous vulnerabilities at the same time. The warning came as Prime Minister Sir Kier Starmer insisted Britain was “well placed” to weather the Iran crisis but admitted that it is clear the impact of the war will affect the country’s future.
The supply shock from the war in Iran is causing a surge in oil prices and is likely to intensify fault lines in the financial system, including tensions in private credit markets, high government debt and stretched valuations, the Bank of England said on Wednesday. “The shock will weigh on growth, increase inflation and tighten financial conditions” the central bank said in the record of last week’s meeting of the Financial Policy Committee.
Keir Starmer stated that the government is introducing a range of measures to help households, including a cut in energy bills from Wednesday. He also said that the government was keeping “under review” proposals to increase fuel duty from September and confirmed that net state help for household energy bills was being prepared for the autumn.
The Bank of England’s warning underscores how central banks around the world are worried the conflict in the Middle East could cause a prolonged oil supply shock that sends the global economy into a period of stagflation. Officials are worried that the UK is particularly exposed to the fallout from the Iran war because of the country’s reliance on imported energy and its exposure to rising government borrowing costs.
The UK mortgage market has been in turmoil since the start of the war in the Middle East, as rising gilt yields and swap rates raised the costs of wholesale funding for lenders and reversed investors’ previous expectations of a gradual reduction in rates over the coming year. Lenders have pulled swaths of their deals, replacing many of them with costlier loans.
Finance site Moneyfacts said on Wednesday that the lowest mortgage rates had jumped from 3.51% a month ago to 4.6%, adding around £150 a month or over £1,810 a year onto a £250,000 loan. Nevertheless, the UK Finance analysis found that 94% of borrowers with fixed rate deals of whichever mortgage expiring this year would, under current conditions, be able to refinance on to rates below the stress test limit to their current loan.
Commodity markets
In the commodity markets, Brent crude futures traded around $109 per barrel on Thursday, falling from recent highs but remaining volatile as US President Donald Trump warned of further military aggression against Iran in the next two to three weeks, dampening hopes for an imminent de-escalation in the conflict.
Trump gave a speech on Wednesday evening about the ongoing Iran war, where he attributed the increase in oil prices to the “Iranian regime launching deranged terror attacks against commercial oil tankers and neighbouring countries that have nothing to do with the conflict”. He added that the US will “hit Iran extremely hard” over the next two to three weeks during a national address on Wednesday, while adding that the war won’t last long and discussions with Tehran are ongoing, leaving a diplomatic resolution on the table.
Traffic in the Strait of Hormuz, which used to see a fifth of the world’s oil and gas flows through, has effectively ground to a halt since the US-Israel war against Iran began on 28th February, sending energy prices soaring in one of the world’s most devastating energy crises. Earlier on Wednesday, President Trump said in a post on Truth Social that Iran had asked for a ceasefire, briefly raising hopes for more oil tanker movement through the waterway, sending oil prices lower.
The Islamic Republic, however, has denied Trump’s claim, saying the waterway won’t be reopened based on the US leader’s “absurd displays” and that the key transit route remains “decisively and dominantly under the control of the IRGC Navy”.
Gold prices traded around $4,620 an ounce on Thursday and are set for a weekly rise, despite optimism over a quick resolution regarding the war in the Middle East fading.
Equity markets
US equity futures fell on Thursday, after President Donald Trump’s national address in Washington caused fears of a prolonged conflict with Iran, even suggesting the country could be pushed into the “Stone Ages”. Still, Trump noted that core objectives in the conflict were nearing completion, urging allies to safeguard shipping through the Strait of Hormuz, while stressing the US no longer “needs it”.
In Wednesday’s regular trading session, the Dow Jones Industrial Average rose 0.48%, the S&P 500 gained 0.72%, whilst the Nasdaq Composite advanced 1.16%. US job openings fell more than expected in February and hiring dropped to the lowest level in nearly six years, government data showed on Tuesday.
Job openings, a measure of labour demand, decreased by 358,000 to 6.882 million by the last day of February, the Labor Department’s Bureau of Labor Statistics said in its Job Openings and Labor Turnover Survey, or JOLTS report. Economists polled by Reuters had forecast 6.918 million unfilled jobs.
The job openings rate dropped to 4.2% from 4.4% in January. Hiring decreased by 498,000 positions to 4.849 million last month, the lowest level since March 2020 at the start of the Covid-19 pandemic. The hiring rate dropped to 3.1% from 3.4% in January. Layoffs and discharges increased 61,000 to a still low 1.721 million, with the rate rising to 1.1% from 1.0% in the prior month.
A reluctance by employers to engage in large-scale hiring or layoffs has created what Federal Reserve Chair Jerome Powell this month called a “Zero-employment growth equilibrium” that has “a feel of downside risk”. Economists blame the lacklustre labour market on uncertainty caused by President Trump’s trade and immigration policies that have undercut demand for and supply of workers. Private nonfarm payrolls growth averaged only 18,000 jobs per month in the three months through February.
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