The conflict in the Middle East has continued to disrupt financial markets for a second consecutive day, causing significant fluctuations in oil and gas prices and leading to a sharp downturn in global stock markets. The escalation of tensions, particularly following recent US-Israeli airstrikes on Iran, has heightened market volatility and diminished expectations of an interest rate cut by the Bank of England later this month.
In London, the stock market has experienced a significant drop, with the FTSE 100 index plummeting approximately 280 points, a decline of 2.6%, bringing it down to 10,501. This marks the index’s worst performance in nearly 11 months, since the market shock related to Donald Trump’s tariff revelations in April 2025. Almost every stock in the index faced losses.
Asian markets mirrored these struggles, with Japan’s Nikkei index falling by 3.1% and South Korea’s Kospi crashing by 7.2%. These declines indicate a broader regional concern regarding economic stability in light of ongoing geopolitical tensions.
The surge in oil prices has been particularly notable, with Brent crude, the global benchmark, skyrocketing by 5.5% to reach $82.02 per barrel. Additionally, UK gas prices saw an alarming increase of 30%, climbing to 148p per therm after a staggering 44% rise the previous day, now standing at nearly double the levels from just a week prior. Such soaring energy prices are expected to complicate UK Chancellor Rachel Reeves’s strategies aimed at curbing inflation and reigniting sluggish economic growth.
In currency markets, the pound has fallen to its lowest value against the US dollar in nearly three months, dropping about 0.8% to $1.33. Meanwhile, Bitcoin also took a hit, decreasing by 2.5%, whereas gold, which had seen a safe-haven rush on Monday, fell by 1.1% to $5,266 per ounce.
UK government borrowing costs have surged, with yields on two-year bonds increasing by 13.5 basis points, while 10-year yields rose by 11bps and 30-year yields climbed by 9bps. The financial landscape reflects a growing consensus that interest rate cuts are becoming unlikely as concerns about inflation gain momentum.
As the conflict expands, fears of inflation are driving market sentiment downward. The probability of a rate cut by the Bank of England at its upcoming meeting on March 19 has significantly decreased from 80% just last week to now only 29%. This development is disappointing for borrowers hoping for reduced rates, which had already been benefitting from six cuts since August 2024.
The rising costs of energy are projected to contribute to upward inflationary pressures, particularly following a decline to 3% in January from 3.4% in December. Jess Ralston, head of energy at the Energy and Climate Intelligence Unit, emphasized the perilous position the UK finds itself in, noting the limited preparedness for another energy crisis and the lingering effects of the previous one.
Concerns are also emerging regarding the international economic implications, as rising oil and gas prices could instigate broader inflationary trends and hinder plans for adjusted interest rates, particularly in the US. Figures from the swaps markets indicate reduced expectations for interest rate cuts by the US central bank this year, diminishing from 61 basis points to just 46 points, suggesting fewer than two quarter-point reductions.
The International Monetary Fund has warned that the ongoing crisis in the Middle East may lead to trade disruptions, heightened economic volatility, and increased energy prices, thereby exacerbating the already uncertain global economic landscape. The extent and duration of the conflict will ultimately determine its overall impact on global markets and economies.
