UK equity indexes weakened on Monday as a wave of risk aversion swept markets worldwide, driven by a sharp rise in oil prices after an escalation of military activity in the Middle East.
Oil climbed almost 8% after retaliatory Iranian attacks disrupted shipping in the crucial Strait of Hormuz following the weekend's bombing by Israel and the United States that killed Iranian Supreme Leader Ayatollah Ali Khamenei. The jump in crude lifted shares of major British energy names and defence contractors, but pressure mounted on sectors more sensitive to domestic demand and travel.
Among large-cap stocks, British oil major Shell advanced about 2% while defence group BAE Systems rose 4.9%. In contrast, lenders and travel-related companies were among the hardest hit as investors reassessed the outlook for travel demand and for inflationary pressures that could affect monetary policy.
The blue-chip FTSE 100 index was down 1% by 1131 GMT, having reached a record high in the previous session. The more domestically oriented FTSE 250 index fell 1.3% as investors rotated away from names exposed to the UK economy.
"If the issues persist, then the market will start to worry about new inflationary pressures and that could lower expectations for near-term interest rate cuts," said Dan Coatsworth, head of markets at AJ Bell.
Major banking stocks suffered notable declines, with HSBC, Barclays and Lloyds Banking Group each sliding between 2.7% and 4.7% as the surge in oil rekindled concerns about a possible pickup in inflation. At the same time, British government bond yields rose as market participants pared back their bets on how quickly the Bank of England might reduce rates.
Traders were assigning a 74% probability that the BoE would cut interest rates later this month, down from around 78% a week earlier, indicating a modest shift in expectations for monetary easing.
Travel names were particularly weak after operator IAG said on Saturday it had cancelled flights to Tel Aviv and Bahrain until March 3; the stock fell 5.8%. The FTSE 350 travel & leisure index dropped 4.6%, with hotel groups and cruise operators among the larger decliners.
Even companies that reported positive underlying numbers did not escape the selloff. Senior, a supplier of components to aircraft manufacturers including Boeing and Airbus, fell 3.7% despite reporting upbeat results.
Separately, an AI-driven stock-picking service highlighted investor interest in assessing bank names. The service evaluates companies using over 100 financial metrics and cites past notable winners, including Super Micro Computer (+185%) and AppLovin (+157%), while suggesting investors can check whether HSBC is featured in its strategies or if there are alternative opportunities in the same sector.
Overall, Monday's price action reflected a broader market response to heightened geopolitical risk: energy and defence stocks benefited from a spike in oil and security concerns, while banks, travel firms and other domestically exposed names were punished amid worries about inflation and economic disruption.