FTSE 100 hits high and oil jumps amid US-Iran tension

Britain's blue-chip index closed at an all-time high of 10,910.55 on Friday, capping a week in which it gained 1.1% whilst Wall Street shed ground and European bourses staggered. The FTSE 100 is now up 9.6% year-to-date, a performance that would have seemed fanciful just months ago when most analysts were preparing their usual dirges about UK equity underperformance.

What makes this rally particularly striking is the backdrop against which it's occurring. US wholesale inflation came in significantly hotter than forecast, whilst tensions between Washington and Tehran ratcheted up to levels not seen in years. This is hardly the environment for equity market exuberance.

The composition question

The more pertinent observation here is what's actually driving the FTSE's performance. Strip away the headline figure and you'll find this isn't a broad-based rally reflecting renewed confidence in British economic prospects. It's a flight to specific defensive and commodity-exposed plays that happen to dominate the index.

BP gained 0.7% on Friday whilst Shell climbed 1.6%, both benefiting from Brent crude's rise above $72 a barrel as geopolitical risk premia returned to oil markets. Gold miners Fresnillo and Endeavour Mining advanced 3.4% and 2.3% respectively as bullion firmed to $5,235.52 an ounce.

These aren't votes of confidence in UK plc — they're hedges against global instability that happen to be listed in London.

Meanwhile, genuinely internationally-exposed British businesses took it on the chin. IAG, owner of British Airways, plunged 7.4% despite reporting strong annual results. Budget carrier easyJet dropped 2.6%. Rising oil prices and Middle Eastern conflict aren't exactly tailwinds for airlines, regardless of how robust their balance sheets might be.

Russ Mould, investment director at AJ Bell, suggested that 2025 "could be a second bumper year in a row for investors putting their faith in UK stocks if current performance trends continue". That's rather generous given we're only two months in, and the recent gains are overwhelmingly concentrated in sectors benefiting from crisis rather than growth.

A genuine rerating or lucky timing?

The question worth examining is whether this represents a structural shift or simply fortuitous index composition at a moment of global uncertainty. The FTSE 100 has underperformed US markets for years, weighed down by Brexit concerns, limited technology exposure, and the perception that London had become a backwater for capital allocation.

Some of those structural headwinds haven't disappeared. Britain's economic growth forecasts remain anaemic. The technology sector presence in the FTSE is minimal compared to the S&P 500's magnificent concentration in mega-cap tech. Yet perhaps that's precisely the point — when growth stocks wobble and investors seek ballast, an index heavy with oil majors, miners, and defensive consumer staples suddenly looks appealing.

Friday's session saw London Stock Exchange Group climb 4.2% after Bank of America analysts pushed back against fears that AI disruption would undermine its data business. Property portal Rightmove jumped 4.3% on dividend news and a buyback programme. These moves suggest at least some appetite for domestically-focused growth stories, not merely defensive positioning.

But aerospace firm Melrose plummeted 12% after questions emerged about its cash flow figures, with bears arguing that factoring adjustments meant it actually produced £67 million in free cash flow rather than the £125 million reported. When investors start picking apart accounting treatments that aggressively, confidence isn't exactly overflowing.

What happens when the crisis passes

The sustainability of this rally hinges almost entirely on factors beyond Britain's control. If US-Iran tensions escalate into military conflict, oil and gold will likely climb further, dragging the FTSE with them. If inflation proves stickier than central banks hope, defensive sectors should continue attracting flows. Should either dynamic reverse — a diplomatic breakthrough in Tehran, or disinflation that reignites risk appetite — the FTSE's compositional advantages evaporate quickly.

Barclays estimates that core PCE inflation, the Federal Reserve's preferred gauge, rose 3.1% year-on-year in January after incorporating the latest producer price data. That's well above the Fed's comfort zone and suggests interest rate cuts remain distant. Higher-for-longer rates typically favour growth over value, tech over commodities, US over UK.

The pound weakened to $1.3458 on Friday from $1.3513 the previous day, another sign that currency markets aren't exactly embracing a British renaissance. European bourses also closed lower, with the CAC 40 down 0.5%, suggesting this isn't a regional phenomenon but something specific to London's index construction.

When your rally is fuelled by geopolitical instability and inflation fears, you're essentially betting that bad news stays bad — a wager that historically hasn't aged particularly well.

Whether the FTSE's outperformance continues depends less on anything happening in Britain and more on how long global uncertainty persists. That's not necessarily a comfortable foundation for a sustained bull market, regardless of how impressive the record closes might appear. When your rally is fuelled by geopolitical instability and inflation fears, you're essentially betting that bad news stays bad.

This article is for informational purposes and does not constitute financial advice.