The FTSE 100 fell to a two-month low on Tuesday as another surge in oil prices drove UK borrowing costs higher, outweighing the usual boost that expensive crude can give London’s heavyweight energy shares.
The blue-chip index dropped 0.59% to 10,634.49 by 1000 GMT, while the FTSE 250 lost 0.46%. Banks and investment firms led the decline, with Standard Chartered down 1.7% and Aberdeen off 2.6%.
Precious and industrial-metals miners also weakened as gold and copper prices fell.
The move left investors focused on whether Britain’s inflation problem is becoming difficult enough to force the Bank of England back towards tighter policy.
Oil is becoming an inflation problem
Brent crude pushed above $108 a barrel as Middle East supply concerns intensified, adding to a roughly 20% rise since the start of September.
That would normally favour the FTSE 100 because of its large energy weighting, but the latest move is increasingly being treated as an inflation shock.
AJ Bell’s Danni Hewson told the Guardian that rising oil prices were becoming harder for UK consumers to absorb and would be firmly in focus when the Bank of England meets this week.
She noted that expectations for a near-term policy move had risen sharply as energy costs climbed.
That tension helps explain why gains in oil producers have not been enough to lift the wider index.
Investors are instead marking down sectors exposed to borrowing costs, weaker household demand and the prospect that rates stay restrictive for longer.
Gilt yields deepen pressure on London shares
The 30-year gilt yield traded around 5.91%, close to levels last seen in 1998, while the 10-year yield has also climbed to its highest since 2007.
The sell-off has been amplified by a broader rise in global bond yields, with the US 10-year Treasury moving above 5%.
The Bank of England is expected to leave Bank Rate unchanged at 3.75% this week, but markets have moved towards additional tightening later this year.
Surging oil prices have revived expectations for a possible increase by November.
The Bank is also under pressure to rethink quantitative tightening.
Reports suggest it may stop selling 20- and 30-year gilts and slow the overall pace of balance-sheet reduction, potentially easing strain at the long end without signalling easier monetary policy.
Weak jobs data adds another complication
Domestic data offered little reassurance.
UK unemployment remained at 4.9% in the three months to July, while payroll employment and vacancies continued to decline. Wage growth also slowed, reinforcing signs that hiring demand is weakening.
At the same time, grocery inflation rose to 2.3% in the four weeks to September 6, according to Worldpanel by Numerator, showing that household price pressure has not disappeared.
Individual stocks provided some relief. Wickes jumped after reporting stronger third-quarter trading, while Trustpilot slumped after keeping its earnings outlook unchanged despite solid revenue growth.
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