London equities fell on Tuesday as a renewed surge in oil prices pushed government borrowing costs sharply higher, reviving concerns about inflation and adding to the fiscal pressures facing the UK government ahead of next month’s Budget.
The FTSE 100 closed down 34.98 points, or 0.3 per cent, at 10,789.28, having fallen as low as 10,689.55 during the session.
The more domestically focused FTSE 250 dropped 417.50 points, or 1.7 per cent, to 24,521.29, while the AIM All-Share fell 1.9 per cent.
The sell-off reflected growing unease over the economic consequences of escalating conflict between the US and Iran, with investors increasingly concerned that higher energy costs could complicate the battle against inflation.
“It’s an unsettling start to September, with the mood tested by renewed conflict between the US and Iran, keeping worries bubbling about high energy costs, inflation and debt, and the knock-on effect on growth,” said Susannah Streeter, chief investment strategist at Wealth Club.
European markets also weakened. Paris’s CAC 40 fell 0.4 per cent, while Frankfurt’s DAX 40 dropped 1.1 per cent. Wall Street followed suit, with the Dow Jones Industrial Average down 0.4 per cent, the S&P 500 falling 0.5 per cent and the Nasdaq Composite declining 0.7 per cent.
The risk-off mood was driven in large part by another sharp move higher in crude prices.
Brent crude for November delivery was trading at $92.48 a barrel by the London market close, compared with $88.06 on Friday. The increase followed reports that two oil tankers in the Strait of Hormuz had been struck overnight by what a Greek security company described as “unknown projectiles”.
The incident marked a fresh escalation in the conflict between Washington and Tehran and renewed fears over the security of one of the world’s most strategically important energy shipping routes.
Commercial traffic through the Strait of Hormuz had been able to move freely before the outbreak of war, but previous attacks on shipping contributed to the collapse of an April ceasefire between the US and Iran.
Tehran has imposed an effective blockade on the waterway since the US and Israel launched their military campaign in late February. Iran has said it intends to charge vessels for passage and has attacked ships it accuses of attempting to circumvent routes approved by the Iranian authorities.
Washington has responded by imposing a rival blockade on Iranian ports.
“This renewal of hostilities threatens the destruction of energy infrastructure across the region. Add this to the Ukrainian attacks on Russian energy assets, and there’s a strong tailwind for oil prices,” said David Morrison, senior market analyst at Trade Nation.
The rise in crude prices quickly fed through to global bond markets, as investors reassessed the prospect of inflation remaining elevated for longer.
The yield on the benchmark US 10-year Treasury rose to 4.77 per cent from 4.68 per cent on Friday, while the 30-year yield climbed to 5.25 per cent from 5.18 per cent.
The moves were particularly acute in the UK. The yield on 10-year gilts rose to 5.22 per cent from 5.15 per cent at the end of last week, while the 30-year yield reached 5.85 per cent.
Earlier in the session, the 10-year gilt yield touched 5.25 per cent, its highest level in 18 years. The 30-year yield reached 5.89 per cent, a level not seen since 1998.
The increase represents a potentially significant problem for the government as it prepares its autumn fiscal statement.
Kathleen Brooks, research director at XTB, said the rise in borrowing costs posed a “major challenge” for the Chancellor ahead of next month’s Budget.
She said: “Every basis point increase in the cost of borrowing in the UK adds to debt servicing costs, which needs to be paid by the public purse. Since the spring, the UK’s interest-only bill has risen by up to £6 billion by the end of this parliament. This is a large hole for the Chancellor to fill next month.”
Sterling weakened alongside UK assets. The pound was trading at $1.3527 at the London close, compared with $1.3560 on Friday. Against the euro, sterling fell to €1.1669 from €1.1686.
The euro slipped to $1.1593 from $1.1603, while the dollar rose marginally against the Japanese currency to ¥160.07.
Inflation concerns were also reinforced by fresh data from the eurozone.
Figures from Eurostat showed annual consumer price inflation accelerated to 3.3 per cent in August, from 2.9 per cent in July. It was the highest rate recorded since September 2023, when inflation stood at 4.3 per cent.
The figures come ahead of next week’s European Central Bank meeting, at which policymakers are expected to raise interest rates by a further 25 basis points.
In London, the higher oil price created a clear divide between energy stocks and the wider market. BP rose 5.2 per cent and Shell gained 2.6 per cent.
Mining shares, however, came under pressure as gold and other metals weakened. Endeavour Mining fell 5.4 per cent, Antofagasta dropped 5.2 per cent and Fresnillo declined 4.9 per cent.
Gold was trading at $4,364.48 an ounce, down from $4,540.70 on Friday.
Reckitt Benckiser was among the strongest performers in the FTSE 100, climbing 4.4 per cent after the consumer goods group said there were no outstanding jury verdicts against its Mead Johnson baby formula business in litigation concerning necrotising enterocolitis.
The company secured a favourable verdict in a case heard in the US District Court for the Northern District of Illinois, where a jury voted unanimously in Reckitt’s favour in the Inman case.
The case was considered a “bellwether” trial among a broader group of lawsuits alleging that formula products for premature babies are linked to NEC, a serious gastrointestinal disease that primarily affects premature infants.
Russ Mould, investment director at AJ Bell, said the verdict “removes a significant area of doubt surrounding the business which could help clear the way to a sale [of Mead Johnson] which Reckitt has been pursuing for some time”.
Reckitt acquired Mead Johnson, the baby milk formula manufacturer, in 2017 for $17.9bn including debt. The business has since been hit by impairments and a series of lawsuits in the US.
In April, France’s Danone was reported to be considering a bid for the division.
On the FTSE 250, Bodycote rose 4.6 per cent after agreeing to a £1.65bn takeover by Veritas Capital Fund Management, although the prospect of a rival offer remained open.
The Macclesfield-based provider of heat treatment and specialist metallurgical technology services said the offer from the New York private equity group valued its shares at 940p each.
Bodycote disclosed in August that it had received two preliminary proposals: one from Veritas worth 914p a share and another from CVC Advisers worth up to 915p.
CVC said it was “considering its position” following the agreed Veritas bid and urged Bodycote shareholders to “take no action”.
Mark Field, an analyst at RBC Capital Markets, said the agreed price “does not appear particularly generous on a take-out basis”, describing it as “merely in line” with the company’s 10-year average enterprise value to earnings before interest, tax and amortisation multiple.
Elsewhere, Capricorn Energy jumped 9.6 per cent after recommending an improved cash takeover offer from Norway’s DNO ASA, which surpassed an earlier proposal from Genel Energy.
The Edinburgh-based oil and gas company said DNO would pay $4.224 a share in cash, alongside a special dividend of $0.99, valuing the total consideration at $5.214 per share.
The offer represents a 10 per cent premium to Genel’s proposal.
Genel said it was “considering its position” and would make a further announcement “when appropriate”. Its shares closed down 7.1 per cent.
Among the FTSE 100’s largest gainers, BP rose 26.80p to 541.30p, Reckitt Benckiser gained 228p to 5,360p, Rentokil Initial added 11.20p to 356.90p, Tesco climbed 14.20p to 471.50p and Airtel Africa rose 9.40p to 342.20p.
The largest fallers included Endeavour Mining, down 258p at 4,484p, Antofagasta, down 211p at 3,828p, Weir, down 140p at 2,706p, Fresnillo, down 154p at 3,016p, and Rolls-Royce, down 71p at 1,459.20p.
Investors will now turn their attention to a busy economic calendar on Wednesday, including an interest rate decision in Canada, US ADP payroll figures, factory orders data and the Federal Reserve’s Beige Book.
In the UK, Cairn Homes and TT Electronics are due to report half-year results.
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