The FTSE 100 slipped to its lowest level in two months on Tuesday, as another sharp rise in crude prices pushed UK government borrowing costs to multi-decade highs, overshadowing the usual boost that expensive oil provides to London's heavyweight energy stocks.
The blue-chip index dropped 0.59% to 10,634.49 by mid-morning, while the more domestically focused FTSE 250 lost 0.46%. Financials led the decline, with Standard Chartered falling 1.7% and Aberdeen down 2.6%. Precious and industrial metals miners also weakened as gold and copper prices retreated.
The market's focus has shifted to whether Britain's inflation problem is becoming severe enough to force the Bank of England back toward tighter monetary policy. Brent crude climbed above $108 a barrel as Middle East supply concerns intensified, adding to a roughly 20% gain since the start of September. While that would typically favor the FTSE 100 due to its large energy weighting, the latest move is increasingly being treated as an inflation shock.
AJ Bell's Danni Hewson noted that rising oil prices are becoming harder for UK consumers to absorb and will be firmly in focus when the Bank of England meets this week. Expectations for a near-term policy move have risen sharply as energy costs climb, she said. That tension helps explain why gains in oil producers have not been enough to lift the wider index. Instead, investors are 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 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 toward 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 its quantitative tightening program. 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 signaling easier monetary policy. Such a move could provide some relief to the gilt market, but investors remain wary.
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. The broader market, however, remains under pressure from the combination of high oil prices, rising yields, and mixed economic signals.
As the Bank of England weighs its next move, the potential halt of long gilt sales could be a key lever. Meanwhile, the US debt topping $40 trillion adds to global borrowing cost concerns. For UK investors, the oil shock's ripple effects remain a central theme.
This article is for informational purposes only and does not constitute financial advice.
