European and US markets tumbled on Thursday as oil prices surged past 105 dollars a barrel, stoking fresh inflation fears among investors already on edge.
The FTSE 100 (^FTSE) closed down 61.14 points, or 0.6%, at 10,608.92, while the FTSE 250 fell 222.72 points, or 0.9%, to finish at 23,885.94.
Brent crude was quoted at 105.51 dollars a barrel at the London equities close, sharply higher from 101.07 dollars late on Wednesday.
Oil prices surged as intensifying tit-for-tat military action between the US and Iran fuelled concerns over disruptions to global energy supplies, adding to inflationary fears already weighing on markets.
European equities also declined, with the CAC 40 (^FCHI) in Paris closing down 0.5% and the DAX 40 (^GDAXI) in Frankfurt ending the session down 0.7%.
The European Central Bank raised its three key interest rates by 25 basis points, taking the deposit facility rate to 2.50%, the main refinancing operations rate to 2.65% and the marginal lending facility rate to 2.90%.
ECB president Christine Lagarde said the decision was unanimous and described the rate increase as a “no-brainer”, but stressed that policymakers did not discuss any future rate decision.
The ECB warned that the US war on Iran continues to generate inflationary pressure and is likely to keep price growth above its 2% target for an extended period.
The bank’s latest staff projections forecast headline inflation averaging 3.0% in 2026, 2.5% in 2027 and 2.1% in 2028, with the 2027 and 2028 forecasts revised higher from June.
More positively, the ECB upgraded its growth forecasts, with gross domestic product now expected to expand 0.9% in 2026, 1.4% in 2027 and 1.5% in 2028.
In the United States, the Bureau of Labour Statistics said producer prices rose 5.4% year-on-year in August, accelerating from 4.8% in July and topping the FXStreet-cited forecast of 5.3%.
US stocks were lower, with the Dow Jones Industrial Average, the S&P 500 index and the Nasdaq Composite each falling 0.4% as investors digested the hotter-than-expected inflation data.
Global bond yields surged as intensifying inflation concerns, fuelled by rising oil prices and hotter-than-expected US producer price data, prompted investors to reassess the interest rate outlook.
The yield on the US 10-year Treasury widened to 4.92% from 4.81%, while the 30-year Treasury yield rose to 5.34% from 5.26%.
Associated British Foods sank to the bottom of the FTSE 100, losing 7.9%, as weaker-than-expected sales at Primark overshadowed plans to launch home delivery at the retail chain.
Industrial metal prices fell sharply, pulling miners lower, with Antofagasta losing 5.7%, Anglo American falling 4.9% and Glencore shedding 4.1%.
Tobacco stocks bucked the trend, with Imperial Brands topping the FTSE 100 with a gain of 1.8%, followed by British American Tobacco, which rose 1.5%.
On the FTSE 250, THG fell 13% after warning that new European Union parcel duties would weigh on third-quarter revenue growth, which the company expects to come in at around 2%.
Among smaller stocks, Eleco surged 70% after the construction software provider accepted a 200 million pound takeover offer from Accel-KKR, while Empyrean Energy jumped 80% following completion of the Duyung farm-down.
Friday’s economic calendar includes UK GDP, trade balance, industrial production figures and US consumer price inflation data, with UK GDP consensus expecting a flat reading month-on-month for July.