Rising oil prices and mounting geopolitical tensions in the Middle East overshadowed a strong performance from Tesco on Thursday, keeping UK and European stocks under pressure.
The FTSE 100 ended the session down 16.90 points, or 0.2%, closing at 10,441.60, having earlier dipped as low as 10,367.25 during trading.
The FTSE 250 fell 92.87 points, or 0.4%, to 23,943.88, while the AIM All-Share shed 5.31 points, or 0.7%, to settle at 770.67.
Oil prices surged after The Atlantic reported the White House has asked the Pentagon to look at strike options on Iranian targets, citing two administration officials.
The report suggested strikes could be made ahead of the US midterm elections on November 3, with a separate Axios report indicating the Pentagon called on Central Command to finalise preparations for a resumption of combat operations in Iran.
Yemen’s Houthis added further pressure by targeting Riyadh airport with missiles and warning staff at Saudi oil facilities to leave as hostilities escalated across the region.
David Morrison, analyst at Trade Nation, noted that tropical storm Isaias is building near the Gulf of Mexico, with both Chevron and Shell reducing offshore production as a result.
“Both Chevron and Shell were reducing offshore production as a result, adding to a 25% oil production shutdown across the region,” Morrison said.
Brent crude was quoted at 105.57 dollars a barrel on Thursday, up sharply from 101.77 dollars late on Wednesday, reflecting the combined weight of geopolitical risk and supply disruption.
Kathleen Brooks, research director at XTB, summarised the situation bluntly, saying “geopolitics, politics and earnings risks are colliding,” noting the higher oil price is pressuring the bond market and causing stocks to sell off.
European equity markets also declined, with the CAC 40 in Paris ending down 0.5% and the DAX 40 in Frankfurt sliding 1.2%, underperforming the FTSE 100’s comparatively modest losses.
In New York, the Dow Jones Industrial Average was down 0.4% at the London close, alongside the S&P 500, while the Nasdaq Composite fell 0.6%.
The yield on the US 10-year Treasury was quoted at 5.34%, creeping up from 5.32% the previous day, as bond markets remained sensitive to inflation and central bank signals.
Minutes from the September Federal Open Market Committee meeting, released Wednesday, showed Fed officials expect one more interest rate rise this year, reinforcing hawkish expectations.
Barclays analyst Marc Giannoni said the minutes suggest a return to risk management alongside growing concern about inflation persistence and higher neutral rates, reinforcing expectations of one additional hike this year.
Fed governor Christopher Waller said at the Istanbul Economic Forum hosted by the Turkish central bank that if economic data continues to come in as expected, he anticipates additional hikes to support a timelier return of inflation to the 2% goal.
Against the broader market weakness, Tesco (TSCO.L) stood out as the FTSE 100’s star performer, climbing 5.2% after delivering better-than-expected half-year results that lifted full-year profit guidance.
The grocer raised the bottom end of its adjusted operating profit guidance to between £3.15 billion and £3.30 billion, up from the previous lower bound of £3.00 billion, and expanded its share buyback programme.
Chief executive Ken Murphy said: “Against an uncertain external backdrop, we have continued to invest in giving customers the very best value for money.”
Dan Coatsworth, head of markets at AJ Bell, praised Tesco’s dual approach of cutting prices to fend off Aldi and Lidl while expanding its premium Finest range, saying the strategy “helped to win customers from Waitrose.”
Tobacco manufacturer Imperial Brands climbed 5.1% after announcing a new £1.5 billion buyback scheme alongside an upbeat trading statement hailing the “strong momentum behind our transformation.”
Oil majors BP and Shell rose 4.1% and 3.6% respectively, buoyed by the surge in crude prices, while Standard Life led the FTSE 100 fallers, dropping 3.8% after Aberdeen sold 52 million shares in the retirement savings provider.