UK borrowing costs spiked sharply on Wednesday after Donald Trump signalled the fragile ceasefire deal with Iran had collapsed entirely.
The yield on ten-year gilts, the primary benchmark for government borrowing costs, surged 11 basis points to 4.96 per cent following a US military escalation.
The United States launched what Trump described as a “series of powerful strikes” on Iran, reigniting fears of a broader regional conflict.
Brent crude, the international benchmark for oil prices, rocketed to a two-week high of $78 per barrel, up sharply from $72 earlier in the week.
While still well below the $120 peak recorded at the height of the crisis in May, the oil price surge reignited inflationary fears that had recently cooled.
European gas prices also climbed five per cent to a month-high of 49 euros per MWh, adding further pressure to already strained energy markets.
Neil Wilson, investor strategist at Saxo Markets, warned that “clearly higher oil prices raises stagflation fears and weighs on the growth outlook.”
Trump’s confrontational stance towards Iran has dominated the Nato summit taking place in Turkey this week, drawing significant attention from allied leaders.
The US President said he didn’t “want to deal” with Iran anymore, branding the talks a “waste of time” and labelling the Iranian leadership “cuckoo.”
Wilson added that Trump’s remarks had “sent sparks flying” and “underscored fears that we could see further escalation” across the region.
Nato head Mark Rutte defended the latest US strikes as “absolutely necessary,” while Iran retaliated by targeting 85 US military sites across Bahrain and Kuwait.
The US and Iran had agreed to a memorandum of understanding on 17 June, pausing military action for 60 days while a lasting peace deal was negotiated.
Thornier issues, including Iran’s nuclear capabilities and control over the Strait of Hormuz, continued to obstruct progress towards any durable agreement.
Investor anxiety triggered a broad equity sell-off, with the FTSE 100 tumbling 1.5 per cent to 10,501 during Wednesday’s trading session.
Susannah Streeter, chief investment strategist at Wealth Club, said increased output from OPEC+ nations helped “keep a lid on concerns about a fresh energy crunch.”
Streeter nonetheless called the breakdown “a major setback just as nations around the world had been breathing a sigh of relief that a longer-term resolution looked to be within reach.”
Oil majors Shell (SHEL) and BP (BP) bucked the wider market trend, rising two per cent and 3.5 per cent respectively to become the FTSE 100’s top performers.