FTSE 100 Rallies on Trump's Iran Optimism. Traders Ignore Pentagon Reality.

London's equity markets staged a dramatic reversal yesterday, with the FTSE 100 surging on a sharp crude oil selloff triggered by Donald Trump's assertion that America's conflict with Iran would end 'very soon'. The rally came despite his Pentagon chief simultaneously announcing the most intense day of strikes inside Iran yet. Markets chose optimism over the concrete reality of ongoing military action.

The contradiction speaks to a deeper tension gripping markets right now. Traders are choosing to price in optimism based on vague diplomatic signals whilst ignoring the rather more concrete reality of US fighters, bombers and missiles continuing to pummel Iranian naval assets. Defence Secretary Pete Hegseth, standing alongside General Dan Caine at Tuesday's briefing, declined to say whether the conflict was at 'the beginning, middle or end', noting only that Trump 'gets to control the throttle'.

A $12-per-barrel swing in crude prices—one of the sharpest single-day moves in recent memory—has been enough to reverse Monday's inflation panic and send European equities soaring. Frankfurt's DAX jumped 2.4%, Paris gained 1.8%, and the FTSE 250 climbed 1.8% to close at 22,492.

Enjoying this article?

Get stories like this in your inbox every week.

Join the Community

The inflation trade unwinds, for now

Monday's sell-off was driven by a straightforward thesis: sustained triple-digit oil prices would feed directly into inflation metrics, forcing central banks to shelve rate cut plans or potentially reverse course entirely. Pension funds took a battering. Energy-heavy indices like the FTSE wobbled under the weight of genuine concern about supply security through the Strait of Hormuz, where a 'substantial amount' of production has been curtailed, according to the International Energy Agency.

Twenty-four hours later, that trade has been unwound on the basis of Trump's 'very soon' timeline—though the president himself qualified that it wouldn't be 'within the next week'.

What's particularly striking for UK investors is how asymmetric this dynamic has become. The FTSE 100's heavy weighting toward energy and mining stocks means geopolitical calm actually creates headwinds for the index's largest constituents. BP shares fell 2.1% yesterday, whilst Shell dropped 0.8%.

Miners rallied in their place. Fresnillo jumped 8.1%, Antofagasta gained 6.0%, and Anglo American climbed 6.6% as the prospect of lower input costs and easing recession fears lifted base metal plays. It's an unusual situation where the same news that benefits the broader market actively hurts the biggest names on the board.

Are traders repricing risk or chasing hope?

The IEA isn't sharing the market's sudden optimism. Following emergency G7 energy minister talks in Paris, the agency's executive director Fatih Birol warned that oil market conditions 'have deteriorated in recent days', creating 'significant and growing risks'. Member states are now convening crisis discussions about potential strategic reserve releases—not exactly the language of a crisis that's winding down.

The question facing investors is whether yesterday's rally represents rational risk repricing or something closer to wishful thinking.

Trump has form for declaring imminent resolutions that fail to materialise, from trade wars to pandemic timelines. His defence secretary's refusal to even characterise what stage of the conflict America is currently in suggests Pentagon planners aren't working to the same optimistic timeline.

Sterling climbed to $1.3458 from $1.3396, whilst the pound edged up against the euro to €1.1648 from €1.1593. Gold pushed higher to $5,228.60 an ounce from $5,104.20, suggesting haven demand hasn't entirely evaporated despite the equity rally. US Treasury yields compressed slightly—the 10-year fell to 4.11% from 4.13%—as bond markets priced in marginally less inflation risk.

What happens next

The Strait of Hormuz remains the critical variable. Roughly a fifth of global oil supply passes through that narrow waterway, and whilst production curtailments have already begun, a meaningful escalation could send crude back above $100 within days. The IEA's warning about 'significant and growing risks' suggests its analysts aren't convinced the worst has passed.

For UK pension holders and institutional investors, the whiplash is particularly acute. Monday's inflation scare threatened to delay Bank of England rate cuts that many retirement portfolios are positioned for. Tuesday's rally suggests those cuts remain on track. Whether that optimism survives contact with Friday's jobs data, next week's CPI print, or the next update from US Central Command remains to be seen.

Corporate earnings continue to provide some ballast. Persimmon climbed 4.5% after delivering £445.6 million in underlying pretax profit, ahead of analyst expectations, with guidance that Jefferies called 'massively reassuring in these uncertain times'. Bill Ackman's Pershing Square jumped 5.7% on news of dual New York listings targeting up to $10 billion in fresh capital.

But those individual stories feel secondary to the broader tension. Markets are pricing in peace based on presidential rhetoric whilst the Pentagon prosecutes what it describes as the most intensive bombing campaign of the conflict to date. One of those narratives will prove correct. Traders betting heavily on the former should probably keep an eye on oil futures when Asian markets open.

More articles by Ross Williams