Leading Indicators | Markets react as uncertainty returns, but some signs of settling appear

Oil prices settle following an early spike

Oil prices surged to $119.50 per barrel at the height of the Middle East conflict - the largest daily jump on record, before easing back to $89.33. Capital Economics expects oil prices to stay elevated, raising the risk of renewed energy‑driven inflation: typically, a 5% rise in oil prices adds around 0.1ppts to developed market inflation. Many businesses are unlikely to have planned for elevated oil prices this year and as a result, higher energy costs may contribute to a more cautious occupier environment over the next six months.

Market volatility has risen, but remains below past periods of elevated stress

Market volatility has also increased, with the VIX - the market’s ‘fear gauge’ - rising to 29.49, above its long-term average of 18.30. During periods of heightened uncertainty, investors often rotate toward perceived safe-haven assets and more defensive allocations such as real estate, particularly as values show signs of stabilising.

Bonds show the recent spike is not just a UK issue  

Global bond yields have come under pressure since the conflict began, as markets reassess the risk that higher energy‑driven inflation could delay interest rate cuts. In the UK, the 10‑year gilt yield initially climbed to 4.72% but has since eased back to 4.55%, reversing Monday’s sharp rise. The rise in yields was part of a broader global trend, with US 10‑year Treasuries, 10‑year JGBs and German Bund yields all moving higher yesterday. Across markets, yields remain volatile as investors continue to react to shifting geopolitical signals and inflation expectations.