The FTSE 100 plunged 1.4% on Tuesday, driven by Middle East tensions and upcoming local elections, closing down 144.82 points at 10,219.11. The blue-chip index suffered its steepest single-day drop since late March as investors weighed a fragile ceasefire in the Gulf against domestic political uncertainty. The FTSE 250 ended 87.80 points, or 0.4%, lower at 22,443.81, while the AIM All-Share bucked the trend, rising 2.62 points, or 0.3%, to 799.28.
European markets fared better: the CAC 40 in Paris closed up 1.1% and the DAX 40 in Frankfurt jumped 1.7%. In New York, the Dow Jones Industrial Average rose 0.5%, the S&P 500 gained 0.7%, and the Nasdaq Composite added 0.9%, leaving the S&P 500 and Nasdaq near record highs.
Middle East conflict rattles markets
The oil price edged higher despite Monday’s sharp gains when London financial markets were closed, with Brent crude for July delivery trading at $110.70 a barrel on Tuesday, up from $108.86 at Friday’s equities close. The fragile ceasefire between the United States and Iran barely held, according to reports, with the UAE stating it was under attack from Iranian missiles and drones. The US military was attempting to reopen shipping routes in the Strait of Hormuz. Iran’s parliamentary speaker, Mohammad Bagher Qalibaf, accused Washington of undermining regional stability and warned of a response to any efforts to control the strait.
US rhetoric remained defiant. US Secretary of War Pete Hegseth — sworn in on 25 January 2025 — told reporters: “We’re not looking for a fight. But Iran also cannot be allowed to block innocent countries and their goods from an international waterway.” He stated that any attack on commercial shipping by Iran would be met with a “devastating” response.
The yield on the US 10-year Treasury rose to 4.42% from 4.38% on Friday, while the yield on the US 30-year Treasury widened to 5.00% from 4.97%, a level not seen since last summer.
UK gilt yields surge ahead of local elections
The yield on UK 10-year gilts jumped to 5.08% on Tuesday from 4.96% late Friday, with domestic politics adding to the drag from the Iran conflict. Thursday’s local elections are expected to inflict heavy council seat losses on the government, potentially triggering a leadership challenge to Prime Minister Sir Keir Starmer.
Michael Brown, senior research strategist at Pepperstone, said the “best-case” outcome for UK assets would be a “relatively contained Labour defeat, which allows PM Starmer to stumble on for a short while longer”. However, he cautioned that any relief rally in sterling and gilts would prove “relatively short-lived” given the political inertia. “For markets, under this scenario, the question would likely rather quickly become one of when sticking with Starmer, and a Government that is struggling to govern, is a worse outcome than changing leader?”
Susannah Streeter, chief investment strategist at Wealth Club, said investors in UK government debt are “uneasy” because a replacement for Starmer might cause the government to veer into less fiscally responsible spending. “Rising gilt yields mean it’s becoming more expensive for the government to finance UK debt, which puts pressure on current budgets,” she said, adding that they also act as a “red flag” for the mortgage market since banks and lenders price many loans off these market moves.
The pound eased to $1.3569 on Tuesday afternoon from $1.3626 on Friday. Against the euro, sterling was higher at €1.1586 from €1.1578. The euro traded lower against the greenback at $1.1707 from $1.1765. The dollar rose against the yen, trading at ¥157.66 from ¥156.74.
HSBC hit by fraud charges and Middle East exposure
London’s banks were among the weakest features, with lenders HSBC, Lloyds, NatWest and Barclays down 5.9%, 3.4%, 3.6% and 3.3% respectively. HSBC was knocked further by mixed first-quarter results: profit before tax came in at $9.4 billion, slightly below the same period last year, with revenue growing 6% to $18.6 billion but higher credit charges and operating costs offsetting the gain.
Expected credit losses rose to $1.3 billion, including a $400 million fraud-related charge linked to a secondary securitisation exposure with a financial sponsor in the UK, and a $300 million increase in allowances to reflect the possible impact of the Middle East conflict. The Financial Times reported the UK fraud charge was tied to the collapsed UK mortgage lender Market Financial Solutions (MFS), citing people familiar with the matter. Without naming the group, HSBC’s chief financial officer Pam Kaur said on a media call: “We have an exposure to a financial sponsor who has an exposure to the company.” A $400 million loss would place HSBC among the lenders hardest hit by the MFS implosion. Last week, Barclays took a £228 million hit from its demise.
Citi analyst Andrew Coombs said the UK charge was “not expected”, while the increase for the Middle East conflict was “broadly as anticipated”. Dan Coatsworth, head of markets at AJ Bell, called the “sizeable” fraud-related charge “a reminder that risks don’t only exist in more far-flung parts of the world”.
Retailers also fell on fears of a knock-on impact from higher energy prices on consumer spending. Marks & Spencer dropped 4.8% and JD Sports, which reports full-year results this week, lost 3%.
Among risers, Intertek gained 6% after Swedish private equity firm EQT raised its takeover bid to 5,800p per share from 5,400p. The FTSE 100 assurance, inspection and testing company, which had previously rejected bids of 5,400p and 5,150p, said it was reviewing the higher proposal. BT rose 3.5% after Bank of America upgraded the stock to “buy” from “neutral”, citing expectations for higher dividends as capex falls sharply after the completion of its fibre build. Gold traded lower at $4,576.51 an ounce, down from $4,637.78 on Friday.
The biggest risers on the FTSE 100 were Intertek up 286p to 5,090p; Spirax up 274p to 7,372p; Polar Capital Technology Trust up 15.5p to 627p; BAE Systems up 42.5p to 2,077p; and Compass up 0.55p to 28.8p. The biggest fallers were Entain down 36.6p to 531.2p; HSBC down 79.6p to 1,279.8p; Marks & Spencer down 16.0p to 321.5p; Fresnillo down 140p to 3,115p; and Weir Group down 110p to 2,490p.
Wednesday’s global economic calendar includes a slew of composite PMI readings, with the UK release at 9.30am and US ADP employment data. The local corporate calendar features trading statements from Diageo, Next and Smith & Nephew.
