Oil prices spiked and stock markets opened lower on Friday after a US airstrike killed Iranian major-general Qassem Soleimani, head of the elite Quds force, in a major escalation of hostility between Washington and Tehran.
Brent Crude rose 3.8 per cent to $68.87 while another key benchmark price, West Texas Intermediate, was up 3.7 per cent to $68.77 by mid-morning.
A sustained rise in oil prices would push up prices for consumers at the pumps and increase costs for businesses.
However, oil companies – which benefit when crude is more expensive – gained strongly on Friday. BP rose 1.6 per cent and Shell was up 1.4 per cent. Smaller oil firms Tullow and Premier jumped 2.9 per cent and 3.7 per cent respectively.
Overall, the prospect of heightened tensions in the Middle East sent European markets downwards. In London, the FTSE 100 index of leading shares fell 0.5 per cent shortly after opening on Friday. France’s CAC 40 was down 0.5 per cent and Germany’s Dax dropped 1.4 per cent.
Traders flocked to safe-haven assets including government bonds and gold, which spiked to a four-month high.
Iran’s supreme leader Ali Khamenei vowed a “harsh” response to the assassination of Soleimani, head of the country’s clandestine overseas forces.
“Harsh vengeance awaits the criminals that got his and other martyrs' blood on their evil hands in last night's incident,” said the supreme leader's statement, which celebrated Soleimani’s life.
The ratcheting up of Middle East tensions adds to a growing list of risks facing the global economy which is already slowing down and dealing with the strain of a trade war between the US and China.
“It's never likely to be good news for the markets when ‘World War III’ is trending on Twitter,” said Russ Mould, investment director at AJ Bell.
“It is therefore hardly a surprise to see yesterday's positive start to 2020 for stocks come to an abrupt end after US air strikes on Baghdad airport killed top Iranian general Qassem Soleimani.”
Mr Bell said that damage to the FTSE 100 had been limited by its heavy weighting towards oil stocks, as well as the weakness of the pound, which boosts the overseas earnings of UK-based multinationals.
“What happens next for equities will depend on what form Iran’s promised ‘severe revenge’ takes and how nations which are more friendly to it, like China and Russia, respond.”
In further bad news for the UK economy on Friday, new figures indicated that construction output contracted sharply in December.
The construction purchasing managers’ index slumped to 44.4 from 45.3 in November. Anything below 50 indicates that activity is shrinking.
