UK stocks rally on US-Iran deal hopes as oil drops

The UK stock market rallied sharply on Wednesday as investor sentiment improved amid growing expectations of a potential agreement between the United States and Iran following months of conflict in the Gulf region.

The benchmark FTSE 100 index rose 2.4% by 1055 GMT, while the midcap FTSE 250 climbed 2.6%, reaching its highest level in two weeks.

The gains came as global equities advanced and oil prices dropped significantly on reports suggesting that Washington and Tehran were close to finalising a one-page memorandum aimed at ending the conflict.

Oil prices fell around 8%, easing concerns over persistent inflationary pressures that had intensified during the prolonged tensions in the Gulf.

Energy stocks decline as crude prices tumble

Despite the broad-based rally in UK equities, energy shares underperformed due to weaker crude prices. The FTSE 350 energy index dropped nearly 4%, tracking the sharp decline in oil markets.

Most other major sectors traded higher during the session.

Economically sensitive segments, including metal miners, banks, travel and leisure companies, and housing-related stocks, all posted strong gains as investors welcomed signs of easing geopolitical tensions.

The decline in oil prices also improved expectations around inflation and monetary policy, prompting traders to reduce bets on future interest rate increases from the Bank of England.

Markets were pricing in 50 basis points of rate hikes by the end of 2026, compared with expectations of more than 60 basis points priced in on Tuesday.

Inflation concerns remain in focus

Investor optimism came despite recent data showing mounting cost pressures for British businesses.

A closely watched survey from S&P Global showed that UK services firms last month recorded the sharpest acceleration in cost pressures in three-and-a-half years.

The report highlighted that the Iran conflict had driven up prices for fuel and raw materials, increasing concerns over inflation and corporate margins.

The latest market moves reflected hopes that a potential agreement between the US and Iran could help stabilise energy markets and reduce pressure on businesses and consumers.

Political uncertainty ahead of local elections

Attention is also turning towards Thursday’s key local elections in the UK, which could present challenges for Prime Minister Keir Starmer and the ruling Labour Party.

The party is expected to face heavy losses following a series of scandals and criticism over its inability to improve living standards.

Investors are also monitoring the political landscape for any indication that Starmer could face pressure over his leadership.

Diageo and Next lead corporate gains

Among individual stocks, shares of Diageo climbed 5.2% after the spirits maker reported third-quarter sales that exceeded market expectations.

Meanwhile, Next plc rose 2.7% after the retailer said it planned to offset higher costs linked to the Iran conflict through modest price increases in certain overseas markets.

The company also reported better-than-expected first-quarter sales, further supporting investor confidence.