The FTSE 100 closed sharply lower on Tuesday, dropping 144.82 points or 1.4% to 10,219.11, as ongoing tensions between the US and Iran weighed on investor sentiment. UK bonds also sold off, with the yield on 10-year gilts rising to 5.08% from 4.96% on Friday, reflecting both geopolitical uncertainty and domestic political risks ahead of local elections.
Market Overview
The FTSE 250 ended down 87.80 points, or 0.4%, at 22,443.81, while the AIM All-Share bucked the trend, rising 2.62 points, or 0.3%, to 799.28. In Europe, the CAC 40 in Paris rose 1.1% and the DAX 40 in Frankfurt jumped 1.7%, while US markets were higher with the Dow Jones up 0.5%, the S&P 500 up 0.7%, and the Nasdaq Composite up 0.9%.
Oil Prices and Middle East Conflict
Brent crude for July delivery traded at $110.70 a barrel on Tuesday, up from $108.86 at the London equities close on Friday. A fragile ceasefire between the US and Iran barely held, with US Secretary of War Pete Hegseth warning that any attack on commercial shipping by Iran would be met with a "devastating" response. He stated: "We're not looking for a fight. But Iran also cannot be allowed to block innocent countries and their goods from an international waterway."
Bank Stocks Lead Declines
London-listed banks were among the worst performers, with HSBC falling 5.9%, Lloyds down 3.4%, NatWest losing 3.6%, and Barclays dropping 3.3%. HSBC was further pressured by mixed first-quarter results, which included a $400 million fraud-related charge tied to a collapsed UK mortgage lender, Market Financial Solutions, and a $300 million increase in allowances for the potential impact of the Middle East conflict. Citi analyst Andrew Coombs said the UK charge was "not expected," while the Middle East provision was "broadly as anticipated." Dan Coatsworth of AJ Bell noted that the "sizeable" fraud charge was "a reminder that risks don't only exist in more far-flung parts of the world."
Retailers Under Pressure
Retailers also fell on fears that higher energy prices could dampen consumer spending. Marks & Spencer dropped 4.8%, while JD Sports, which reports full-year results this week, declined 3%.
Gilt Yields and Political Uncertainty
UK 10-year gilt yields rose to 5.08% from 4.96% late Friday, with domestic politics adding to the drag from the Iran war. Thursday's local elections are expected to see the government suffer significant council seat losses, potentially sparking a leadership challenge to Prime Minister Sir Keir Starmer. Michael Brown of Pepperstone said the "best-case" outcome for UK assets would be a "relatively contained Labour defeat" allowing Starmer to continue, but cautioned that any relief rally in sterling and gilts would likely be short-lived. Susannah Streeter of Wealth Club noted that rising gilt yields make it more expensive for the government to finance debt and act as a "red flag" for the mortgage market.
Currency and Commodity Markets
The pound eased to $1.3569 from $1.3626 on Friday, while sterling strengthened against the euro to €1.1586 from €1.1578. The euro traded lower against the dollar at $1.1707 from $1.1765, and the dollar rose against the yen to ¥157.66 from ¥156.74. Gold fell to $4,576.51 an ounce from $4,637.78 on Friday.
Top Movers
Leading the risers on the FTSE 100 was Intertek, up 6% after EQT increased its bid proposal to 5,800p per share from 5,400p. BT gained 3.5% after Bank of America upgraded it to "buy" on hopes for higher dividends. Other gainers included Spirax, Polar Capital Technology Trust, BAE Systems, and Compass. The biggest fallers were Entain, HSBC, Marks & Spencer, Fresnillo, and Weir Group.
Looking Ahead
Wednesday's economic calendar includes composite PMI readings from the UK and US ADP employment data. Corporate results are due from Diageo, Next, and Smith & Nephew.
