Britain’s blue-chip stock index climbed to its highest level since the first week of the Iran war this morning, as hopes of a Middle East peace deal, weaker US jobs data and a rotation of investor cash out of high-flying chip stocks combined to lift the FTSE 100.
The index hit 10,701 points shortly after opening, up 0.4 per cent on the day and its strongest level since 3 March. Precious metals miner Fresnillo led the risers, gaining 2.5 per cent, followed by engineering firm Weir Group (up 2 per cent) and energy company SSE (up 1.8 per cent). The gains could not be sustained, however, and the FTSE 100 later slipped into the red, falling 45 points to 10,607 as weaker-than-expected UK service sector data dampened sentiment.
Oil, Jobs and a Market Rotation Drive the Rally
Three factors powered the early advance. First, growing confidence that the US and Iran can maintain their fragile ceasefire has driven oil prices sharply lower. Brent crude has fallen from $126 a barrel at the end of April to $72 this morning, wiping out the entire spike triggered by the outbreak of hostilities. Analysts at Citigroup expect Brent to fall to $60 a barrel by the end of the year, a level last seen in January, as shipping flows normalise and Chinese buyers remain absent from the market.
Second, a weaker-than-expected US employment report published yesterday has cheered traders by dampening expectations of further rises in American interest rates. Dan Coatsworth, head of markets at AJ Bell, said: “Weak jobs numbers would normally be a key reason for central banks to consider cutting rates to stimulate the economy. The latest US jobs data confirms labour market disappointment but we’re nowhere near the stage where the Fed will reach for the monetary policy scissors to start cutting. We’re more likely to see an adjustment to the Fed’s assessment that implies no change to rates, which is still a win for markets.”
Third, and most consequential for the composition of the rally, investors are “rotating” out of chip stocks – which enjoyed a stellar start to the year but are now being punished for sky-high valuations – and into “old economy” companies. London’s stock market is packed with such firms, making the FTSE 100 a direct beneficiary of the shift.
The rotation has been visible across global markets. America’s Dow Jones Industrial Average, a classic old-economy index, hit record highs on both the first two trading days of July and futures point to further gains. Germany’s DAX index has also set a new all-time high, up 0.7 per cent, lifting the pan-European Stoxx 600 to a fresh intraday peak. The Stoxx 600 is on course for its biggest weekly gain since mid-May.
Chris Beauchamp, chief market analyst at trading platform IG, explained the dynamic: “June was a spectacular month for the old-economy index that is the Dow Jones, which saw it rally sharply even as the surge in the Nasdaq hit a wall. The index has clocked up new record highs on both days of July trading, and active futures have pushed higher this morning. This is the kind of healthy action investors want to see, as different leadership emerges, while the weaker payroll report has restarted the ‘bad news is good news’ routine, since it helps to push back the dreaded idea of Fed rate hikes. Chip stocks are being punished for sky high valuations, but the consolidation has yet to turn into anything more serious.”
The lower oil price has also reduced the risk that eurozone interest rates will be raised further later this year, adding to the positive momentum across European bourses.
UK Service Sector Shrinks at Fastest Pace in Three and a Half Years
The early optimism on London’s markets gave way to caution after data firm S&P Global reported that the UK services sector contracted in June at the steepest rate since January 2023. Its Services PMI fell to 48.8, down from 49.3 in May and firmly below the 50-point mark that separates growth from contraction. Because services make up around three-quarters of the British economy, the weakness pulled the wider private sector into contraction for the second month running: the UK Composite PMI dropped to 49.3 from 49.7.
Service providers cited “lacklustre domestic economic conditions, ongoing geopolitical uncertainties linked to the Middle East conflict and general risk aversion among clients” as the main reasons for the downturn. Exports fell, and employment declined at the sharpest pace since February, with many firms making redundancies or not replacing departing staff in response to reduced business and pressure on margins.
Cost pressures persisted, driven by rising wages, higher motor fuel costs and more expensive IT equipment. S&P Global reported that 42 per cent of survey panel members saw an increase in their average cost burdens in June, while only 3 per cent signalled a reduction. Still, the rate of input cost inflation slowed from the 41-month peak recorded in April.
Consumer-facing businesses noted that the late-June heatwave had depressed footfall. However, some hospitality companies reported a recent boost to demand linked to the ongoing FIFA World Cup – a tournament that the research by S&P Global and other analysts suggests could deliver a £7.6 billion uplift to the UK economy between May and July, with hospitality alone benefiting to the tune of £4.2 billion in extra revenue. Relaxed licensing rules for knockout matches may allow pubs to stay open until 2am, though time zone differences mean many England games kick off at 9pm or 10pm UK time.
Tim Moore, economics director at S&P Global Market Intelligence, said: “June data confirmed a clear loss of momentum for the UK economy during the second quarter of 2026, following a positive start to the year. The latest survey indicated a decline in service sector activity for the second month running and, although only modest, the rate of decline was the steepest since January 2023. Strong cost pressures, lacklustre demand and business uncertainties arising from the Middle East conflict were the most prominent themes highlighted by service sector firms in June. This led to fragile investment sentiment, elevated risk aversion among clients and squeezed consumer budgets, which in turn contributed to the fastest reduction in new work for just over three-and-a-half years.”
The UK economy grew robustly in the first quarter of 2026, with output expanding by 0.6 per cent, but households were already under strain before the full impact of the Iran conflict. The OECD has revised down its UK GDP growth forecast for 2026 to 0.7 per cent, and the IMF to 0.8 per cent, citing the economy’s higher exposure to energy price shocks compared to its peers.
Global Factors: Sterling, Food Prices and the Fragile Ceasefire
Against this backdrop, the pound has strengthened markedly. Sterling has risen for seven consecutive days against the US dollar and is heading for its biggest weekly jump in 12 weeks, up 1.2 per cent so far to $1.3355. The rally has been aided by the City taking in its stride the likely coronation of Andy Burnham as Labour leader and prime minister, after he pledged to work within existing fiscal rules. More broadly, the dollar has fallen as expectations of US interest rate rises recede and optimism over the US-Iran peace deal spurs demand for riskier currencies.
The peace agreement, signed on 17 June, includes the reopening of the Strait of Hormuz to commercial shipping. Traffic through the strategic waterway has surged: on 18 June, 25 commercial vessels crossed, the highest single-day count since 18 April and more than five times the average daily level in early June. Saudi Arabia has dramatically accelerated its oil shipments through the Strait, more than doubling wartime volumes in the two weeks after the deal. However, traffic remains well below pre-war levels, and the ceasefire remains fragile. Talks between the US and Iran have been paused as Iran prepares for the funeral of Supreme Leader Ali Khamenei, who was assassinated on the first day of the conflict in joint US-Israeli airstrikes. The funeral ceremonies are scheduled for 4-6 July, and Iran has indicated it will not meet directly with US delegates in Qatar for now.
James Hosie, equity analyst at Shore Capital, warned that oil prices could spike again if diplomacy stalls. “The current US-Iran ceasefire remains fragile after an Iranian drone strike on a Panama-flagged oil tanker last week was followed by both sides targeting regional military sites,” he said. “At this stage, the attacks do not appear to have materially disrupted vessel owners’ willingness to navigate the Strait. A return of blockades could cause a spike in Brent back above $100 per barrel, although we would anticipate markets pricing in such disruption with the assumption that it is very temporary and becoming a catalyst for further ceasefire talks. A breakdown in diplomacy leading to a resumption of daily missile strikes between the US or Israel and Iran could result in a return to higher oil prices for a more sustained period.”
Meanwhile, global food commodity prices dipped in June, bringing some relief to consumers. The UN Food and Agriculture Organisation reported that its Food Price Index fell 0.3 per cent month-on-month. Cereal prices dropped 3.5 per cent, driven by rapid harvest progress and strong supply prospects in the Black Sea region that outweighed drought fears in the US and Australia. Sugar prices fell 5.7 per cent, thanks to lower domestic ethanol prices in Brazil and a weaker Brazilian real that boosted exports. Dairy prices declined 1.5 per cent, with skim milk powder, butter and cheese all cheaper due to recovering output in the EU and improved availabilities in the US. The falls were partly offset by a 3.8 per cent jump in vegetable oil prices, led by palm oil amid expectations of tighter export availability from Indonesia, and rapeseed oil pushed up by biofuel demand and unfavourable weather in Australia and Canada. Meat prices edged up 0.4 per cent, with poultry and ovine prices rising while pig and bovine meat declined.
