Oil prices jump 3.5%, European shares fall on Middle East escalation
Oil prices surged by as much as 3.5%, while European shares opened lower amid rising tensions between the US and Iran, unsettling investors.
Brent crude surpassed $86 a barrel, currently up 3.4% at $86.15 per barrel, following the US conducting a third consecutive night of military strikes against Iran. Additionally, former President Donald Trump announced a blockade on Iranian shipping and imposed a 20% fee on cargo transiting the Strait of Hormuz.
Trump stated the passage would remain open "with or without Iran," but the US would begin charging fees on ships passing through the waterway, marking a policy reversal. The 20% fee would cover "any and all costs necessary" to ensure security and safety for vessels.
The FTSE 100 index in London declined 0.5%, or 52 points, to 10,445. The German DAX dropped 0.55%, the French CAC lost 0.9%, the Italian Borsa fell 0.7%, and the Spanish IBEX tumbled 1.07%.
BP led the FTSE 100 with a 3% gain, while Shell shares rose 1.7%, following a trading update from BP.
BP reported that net debt at the end of Q2 is expected to decrease to between $22 billion and $23 billion, down from $25.3 billion in Q1. The company also anticipates its Q2 oil trading results to be "slightly higher" compared to Q1.
Victoria Scholar, head of investment at the trading platform Interactive Investor, said:
"That’s even after an extremely strong period for oil trading last quarter when the Iran war fuelled energy shock supercharged earnings which more than doubled year-on-year.
It appears that the Middle East uncertainty is here to stay at least for now after the US said it will reimpose a naval blockade on Iran, reversing course after last month’s steps towards a peace deal with Iran. Ongoing higher oil prices are supportive of BP’s share price as well as its earnings in the near-term, but the company’s outlook is highly vulnerable to developments in the Iran conflict beyond its control."
Gas prices rise as Middle East tensions ratchet higher
Gas prices also increased as tensions between the US and Iran intensified.
The Dutch natural gas contract for August delivery, the European benchmark, rose nearly 3% to €52.8 per megawatt hour.
The UK natural gas contract for August delivery climbed 3.3% to 128.27p per therm, reaching its highest level in over three months.
Dan Coatsworth, head of markets at AJ Bell, said:
"Investors feel like they’ve hit rewind on a movie they didn’t enjoy first time round. The ability to get shipping through the Strait of Hormuz is once again compromised thanks to the renewed tensions between Tehran and Washington.
For now, investors seem to be retaining a measure of calm and hoping a path towards a resolution in the Middle East can still be found. The longer the current situation persists though, the more likely market sentiment takes a more serious hit."
The UK market performed better than most other European markets due to its significant exposure to the energy sector through BP and Shell.
Stocks linked to the travel sector, retailers, and housebuilders declined as investors considered the potential implications of higher inflation and interest rates.
The oil price rose more than 3% to $85.89 per barrel, marking the first time Brent crude exceeded $85 since the US and Iran announced their ceasefire.
China’s car exports reached a record 1 million units in June amid a broader surge in trade, potentially increasing tensions with European and other trading partners.
Shipments of cars increased 71.2% year-on-year to 1.06 million in June, according to Chinese customs data.
This trajectory positions China to export over 10 million cars this year, up from 7.1 million last year and more than double the 4.9 million sold abroad in 2023, according to the Financial Times.
Domestic sales in China have slowed sharply after Beijing phased out electric vehicle subsidies and as demand for petrol and diesel cars declined.
The surge in Chinese exports has led the EU and other regions to impose steep tariffs on car imports from China.
China’s crude oil imports fell 41.3% to their lowest level in nearly a decade in June, as refinery run rates hit a ten-year low due to weak domestic demand and export restrictions on refined oil products aimed at safeguarding energy security amid the Iran conflict.
China imported 29.27 million tonnes of crude oil in June, equivalent to 7.12 million barrels per day, the lowest since October 2016.
Introduction: Oil prices rise over 2% after Middle East strikes; China’s exports surge on back of AI boom
Good morning, and welcome to our continuous coverage of business, financial markets, and the global economy.
Oil prices increased more than 2% after the Middle East conflict intensified, with the US conducting a third consecutive night of strikes against Iran. Two tankers were attacked in the Strait of Hormuz.
Brent crude, the global benchmark, rose 2.2% to $85.15 per barrel, reaching $85.64 in early London trading.
Donald Trump announced the US would reinstate its blockade of Iranian shipping in the Gulf but assured the strait would remain open "with or without Iran."
Susannah Streeter, chief investment strategist at the Wealth Club, said:
"Stasis has taken over markets as investors wait for the latest twist in the Iran conflict and brace for higher energy prices to filter through to economies. Brent crude has surged even higher, topping $84 a barrel, while European gas prices have shot up to levels not seen in three months."
China experienced a surge in exports last month, driven by orders for chips and computing power to support the global AI boom.
Exports increased 27% year-on-year in US dollar terms, the largest rise in four months, according to Chinese customs data. This exceeded May’s 19.4% gain and the 18.2% forecast by economists.
This suggests China is likely to post a trade surplus exceeding $1 trillion for a second consecutive year, despite slowing growth in major economies and trade tensions with Washington. The country remains heavily reliant on exports to offset sluggish domestic demand amid a prolonged property crisis.
Imports rose 36% following May’s 27.4% increase, marking a five-year high. Economists had predicted 24% growth for June. China recorded a trade surplus of $125.6 billion in June, up from $105.4 billion in May.
The surge in global AI investment is compensating for export losses caused by the Middle East conflict.
Xu Tianchen, senior economist at the Economist Intelligence Unit in Beijing, said:
"Continued export strength, mostly driven by AI, points to a better second half, coupled with a more expansionary policy mix, accelerated fiscal spending and mild monetary easing, as well as a de-escalation of the situation in the Middle East, which will benefit China through lower oil prices.
But domestic demand remains a drag. Retail sales remain pretty flat and fixed asset investment was negative last month."
Annual exports accounted for 24% of total manufacturing sales over the first four months of this year, according to a recent report by Gavekal Dragonomics, a consultancy. This is the highest level since China joined the World Trade Organization in 2001. In 2019, the ratio was 18.3%, rising to 22.3% last year. The report stated:
"That would be considered high for a small export-focused country; for the world’s second-largest economy, it is remarkable."
Zhiwei Zhang, chief economist at Pinpoint Asset Management, told :
"I think exports will remain strong in the second half of the year. Meanwhile, it also puts further pressure on the trade tensions between China and its trading partners, Europe in particular."
Analysts noted that rising semiconductor prices are increasing both import and export values.
Imports from South Korea, a major chip manufacturer, rose 85% last month, while purchases from Taiwan, another significant semiconductor producer, increased 41.1% over the same period.
Customs Vice Minister Wang Jun expressed confidence that exports would remain resilient into the second half of the year, led by technology, despite external pressures.
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