FTSE 100 Surges on Middle East Peace Optimism as US and Iran Signal Truce
The FTSE 100 and FTSE 250 experienced significant gains at Wednesday's close, propelled by growing market optimism that a resolution to the Middle East conflict may be imminent. European equities rallied broadly following encouraging statements from both US and Iranian officials, suggesting a potential ceasefire could be on the horizon.
Russ Mould, investment director at AJ Bell, noted, "The market appears increasingly optimistic that an end to the war in Iran is in the offing, with big gains in the US and Asia mirrored across European indices." The FTSE 100 closed up 188.34 points, or 1.9%, at 10,364.79, while the FTSE 250 advanced 484.48 points, or 2.3%, to 21,688.19. The AIM All-Share index also rose sharply, gaining 22.13 points, or 3.1%, to settle at 739.25.
Diplomatic Moves and Market Reactions
On Wednesday, US President Donald Trump indicated that Iran had requested a ceasefire, but he emphasized that the US would only consider such a move once the Strait of Hormuz, a critical oil and gas shipping route currently blocked by Iran, is reopened for safe passage. This statement followed Trump's earlier remarks on Tuesday, where he suggested US operations in Iran could conclude "very soon," possibly within two to three weeks. The president is scheduled to deliver a televised address later in the day.
In a parallel development, Iranian President Masoud Pezeshkian expressed the Islamic republic's "necessary will" to end the hostilities, provided that adversaries guarantee the conflict would not reignite. However, Israeli Prime Minister Benjamin Netanyahu remained steadfast, vowing to continue Israel's military campaign to "crush the terror regime."
Amid these diplomatic signals, Brent crude oil prices retreated to $101.83 per barrel on Wednesday afternoon, down from $107.38 late Tuesday. European stock markets reflected the positive sentiment, with Paris's CAC 40 closing up 2.1% and Frankfurt's DAX 40 rising 2.7%. In New York, stocks extended Tuesday's robust gains, with the Dow Jones Industrial Average and S&P 500 index both up 0.9%, and the Nasdaq Composite advancing 1.3%.
Economic Implications and Central Bank Warnings
Michael Brown, senior research strategist at Pepperstone, highlighted that while "euphoria, exuberance, and relief" have driven a rebound in risk appetite, the surge in energy prices means a rise in headline inflation over the coming months is essentially "baked in." He added, "Considerably higher energy prices and continued supply chain disruption are likely to bring substantial growth headwinds, amounting to a notable negative demand shock that could weaken already anaemic economic momentum, particularly in Europe." Brown believes financial markets have not "ignored" these risks but are temporarily "parking these worries to be dealt with on some other day in the future."
Echoing these concerns, the Bank of England warned that the Middle East war has caused "a substantial negative supply shock to the global economy," increasing risks to financial stability. The central bank noted that the fallout will likely dampen economic growth and tighten financial conditions, such as restricted bank lending. In a quarterly update, the Bank stated, "Adverse impacts on the global macroeconomy increase the likelihood that multiple vulnerabilities could crystallise simultaneously, amplifying their effect on financial stability."
Bank of England Governor Andrew Bailey sought to temper expectations of interest rate hikes, commenting in an interview with Reuters, "That is a judgment markets have to make, but I think they're getting ahead of themselves."
UK Political and Diplomatic Responses
Prime Minister Sir Keir Starmer acknowledged that the UK could weather the economic storm caused by the Iran conflict but admitted the crisis will "affect the future of our country" as households face higher fuel costs and potential energy bill hikes later this year. The UK is spearheading a diplomatic initiative to reopen the Strait of Hormuz, though Sir Keir conceded that restoring global trade flows will be challenging.
Foreign Secretary Yvette Cooper will host an international meeting on Thursday to "assess all viable diplomatic and political measures" to reopen the strait. This follows 35 countries signing a statement expressing willingness to contribute to efforts ensuring safe shipping passage.
Market Movements and Corporate Updates
In currency markets, the pound rose to $1.3324 on Wednesday afternoon from $1.3205 at Tuesday's equities close, while sterling firmed against the euro to €1.1476 from €1.1463. The euro strengthened against the dollar to $1.1608 from $1.1523, and the dollar traded lower against the yen at 158.66 yen compared to 159.02 yen. US Treasury yields narrowed slightly, with the 10-year yield at 4.31% and the 30-year yield at 4.89%.
On the FTSE 100, the risk-on sentiment fueled gains for banks, with Lloyds up 5.8%, NatWest up 5.4%, and Barclays up 5.1%. British Airways owner International Consolidated Airlines soared 5.7%, while budget airlines easyJet and Wizz Air jumped 5.0% and 6.2%, respectively. However, housebuilder Berkeley Group plunged 9.7% after halting land purchases due to uncertainty from the Iran war, leading to significant profit downgrades. In an unscheduled update, Berkeley said it is reducing work-in-progress investment and will not acquire new land, anticipating pre-tax profit above £1.4 billion for 2027-2030, which analysts noted is 29% below consensus estimates.
Russ Mould remarked, "Berkeley has a long-standing reputation for being adroit at calling the ups and downs of the property market. In that context, the moves the company has announced today will make others sit up and take notice." Rightmove fell 1.4% as it vowed to "defend vigorously" a proposed class action claim alleging excessive fees, with the Competition Appeal Tribunal reviewing the application.
On the FTSE 250, Trustpilot climbed 7.3% after an upgrade to "buy" from Panmure Liberum, and Raspberry Pi extended gains with a 13% rise. Gold traded higher at $4,781.92 per ounce. The biggest risers on the FTSE 100 included Babcock International, Rolls Royce, 3i Group, Endeavour Mining, and Fresnillo, while the biggest fallers were Berkeley Group, BP, Shell, Rightmove, and British American Tobacco.
Looking ahead, Thursday's global economic calendar features trade figures from the US and Canada, along with US weekly jobless claims. Domestically, Baillie Gifford Japan Trust is set to release half-year results.
