Market snapshot: how new Middle East flare-up is moving markets

US President Donald Trump pictured yesterday at the NATO summit in Ankara, Turkey. Photo: SAUL LOEB/AFP via Getty Images.

Global markets teetered as the resumption of hostilities in the Middle East reignited inflation concerns and underlined that the intransigence of both sides could lead to a prolonged crisis.

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In the US, concerns around the rotation trade were temporarily shelved with the conflict moving back to centre stage. The President’s comment at the NATO summit that he considers the ceasefire to be over was followed by a second day of strikes between the US and Iran in the region.

The US has two red lines which cannot be negotiated, namely the removal of a nuclear threat from Iran and free passage of oil through the Strait of Hormuz, both of which are seemingly falling on deaf Iranian ears. Reports indicated that there is still some traffic passing through the waterway, although at lower levels given the new burst of military activity, all of which sent the oil price higher by around 6% to $78 per barrel.

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At this level, the oil price has risen by 18% so far this year and has exceeded the $72 price prior to the beginning of hostilities. Perhaps more promisingly the March peak of around $120 per barrel remains some way off, although traders will scrutinise events and the level of hostilities over the next few days. In any event, the move is enough to bring inflationary concerns back into focus at a time when the release of the latest Federal Reserve minutes showed a split among the committee, with some participants expecting an easing focus as the year wears on, but “many others” expecting rates to be above the current range.

In a volatile session, the Dow Jones bore the brunt of the renewed confusion with a decline of more than 1%, while consumer stocks such as The Home Depot Inc (NYSE:HD) and McDonald's Corp (NYSE:MCD), which could be affected by higher energy prices, slid as a result.

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There was some stabilisation in the chip trade, which has seen increasing levels of pressure over recent trading days, with the VanEck Semiconductor exchange-traded fund (ETF) rising by around 2%, although down 12% from its recent high. In what could be a positive development in terms of demand, it was reported that South Korean chipmaker SK Hynix's share offering was more than seven times oversubscribed ahead of its listing on Nasdaq, which is due to start tomorrow.

With a fresh bout of volatility now emerging, the main indices are for the moment cushioned from any potential blows by their more recent performances. The Dow Jones remains ahead by 8.9%, while the S&P500 and Nasdaq have gained 9.3% and 11.3% respectively, all of which provide something of a buffer against further headwinds.

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The theme was similar across Asia, although the Nikkei 225 in Japan managed to reverse a three-day losing streak to stand just over 1% higher. While the country is much more dependent on energy imports which was an inevitable drag on prices, this was more than offset by a bounce in technology shares, with the likes of Tokyo Electron jumping 5% alongside a smaller hike for SoftBank Group.

However, inflation fears were most keenly felt in the bond market, where the yield on 10-year Japanese government bonds rose to 2.9%, the highest since 1996. It is understood that China has less energy pressure given its oil trading arrangements with Iran and Russia, but the Shanghai Composite nonetheless drifted after a report revealing a rise to 4.1% in June for the producer price index, up from 3.9% the previous month and confirming that the country is not exempt from inflationary pressure arising from the conflict.

The FTSE100 opened slightly higher, having endured a bruising session yesterday as the fresh round of hostilities unfolded, but was soon back in the red thanks largely to AstraZeneca (LSE:AZN). Astra shares slid by 8% after revealing that its trial for a rare type of heart disease had failed to meet its primary objective. Outside of its core oncology business, investors had been hoping for progress elsewhere so the news was poorly received, even though the shares remain ahead by 24% over the last year. Despite that, the group is the second largest in the FTSE100 with a market cap of £203 billion and therefore has a disproportionate effect on the market’s movements.

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Elsewhere, Computacenter (LSE:CCC) shares spiked by around 10% as the technology and service provider said that it expects adjusted pre-tax profit to double over the first half compared to the previous year, driven largely by demand from North American hyper scalers.

Mining stocks were at least temporarily back in fashion, with Antofagasta (LSE:ANTO) towards the top of the leader board having been bolstered by a broker upgrade. Strength was also seen in the financials, with the banks in particular benefiting from what could yet prove to be an interest rate environment which works in their favour. As the US banks begin the quarterly earnings season in earnest next week, there could be several read across movements, especially for the likes of Barclays (LSE:BARC) which has a strong regional presence.

The further retreat leaves the FTSE100 ahead by 5.2% so far this year, although struggling to regain its February record highs, which are presently some 4.5% away.