Markets in reverse on Middle East tensions and weighing up the impact of higher oil prices

“A sense of nervousness is hanging over the markets as the new trading week kicks off. Investors are worried about Middle East tensions escalating, hence why equities fall across Europe and Asia,” comments Russ Mould, Investment Director at AJ Bell.

“The FTSE 100 fell 0.5% to 7,588. Overseas, Hong Kong’s Hang Seng index retreated 1%, Germany’s DAX index dropped 1.1%, and Japan’s Nikkei 225 index slumped 1.9%.

“Interestingly the market isn’t behaving as you might expect. In times of strife you would normally expect to see people flock to defensive sectors like utilities and healthcare. In reality the only so-called safe-haven seeing price appreciation is gold which has now increased by nearly 8% over the past 30 days.

“London-listed utilities and healthcare stocks are falling along with many other sectors, perhaps as the equity asset class as a whole is viewed as too high risk in the current climate.

“On the London market the only sector with a rising trend is energy which is BP and Royal Dutch Shell moving higher as a result of a stronger oil price.”

Sector movements on the FTSE 100 on Monday:

Energy +0.88%
Utilities -0.27%
Technology -0.44%
Consumer non-cyclicals -0.48%
Telecoms -0.54%
Healthcare -0.60%
Consumer cyclicals -0.73%
Industrials -0.74%
Basic materials -0.78%
Financials -0.92%

Oil prices

“Oil prices are often a good barometer for the state of play in the Middle East, given how much of the black stuff is produced there, so it is unsurprising to see Brent crude trading at its highest level in several months above $70 per barrel amid the escalating tensions in the region.

“Following the US airstrike on Baghdad airport which killed top Iranian general Qasem Soleimani, tweets from US President Donald Trump which suggested the administration would respond ‘disproportionately’ to any retaliation from Iran and threats of sanctions if Iraq expels troops from the country have further inflamed the situation.

“There is also the nagging fear that Iran will resume its nuclear programme in earnest.

“The direction of oil prices matters, not just for the cost of filling a tank with petrol, but also for investors due to the dominant position of BP and Royal Dutch Shell in the UK stock market.

“These two giant oil companies account for a big proportion of the FTSE 100’s market cap, earnings and crucially dividends.

“Higher oil prices can also act as a drag on economic growth as the costs of transport and materials like plastic increase.

“Most observers believe a much bigger spike in oil would be required to have a significant impact on the global economy. But a fully blown conflict in the Middle East could deliver such a spike and investors may now need to add this to their list of worries for 2020.”

These articles are for information purposes only and are not a personal recommendation or advice.