US and UK equity markets pulled back on Thursday, surrendering a portion of the previous session's relief rally as investors grappled with persistent geopolitical uncertainty in the Middle East and awaited key US inflation data. The cautious tone reflected a broader reassessment of risk appetite ahead of critical economic signals.
In the United States, futures pointed to a lower open. S&P 500 and Nasdaq 100 futures both declined by 0.4%, while Dow Jones Industrial Average futures dropped 194 points, also a 0.4% decrease. This modest pullback followed Wednesday's significant rally, which saw the S&P 500 and Nasdaq post their biggest gains in over a week and the Dow record its sharpest one-day rise in a year on initial ceasefire optimism.
The fragility of the Middle East ceasefire agreement is a primary concern. Despite a two-week truce, reports of continued fighting and a statement from President Donald Trump that the US would maintain military assets in the region until Iran agrees to a lasting peace deal have underscored fears of a renewed escalation. A critical focus for markets is the normalization of energy flows through the Strait of Hormuz, a waterway that carries approximately 20% of global oil supply. Analysts at BCA Research noted markets require credible signs of routes reopening before extending the recent advance in risk assets.
Concurrently, investors are bracing for the release of the Personal Consumption Expenditures (PCE) price index, the Federal Reserve's preferred inflation gauge. With US interest rates on hold since July and expectations for cuts fading due to resilient consumer spending, a firmer-than-expected reading could reinforce the view that policymakers will keep borrowing costs higher for longer.
In London, the FTSE 100 fell 0.3% and the FTSE 250 dropped 1.1%, led by declines in retailers and smaller companies. The retreat mirrored the US sentiment, with the previous day's rally proving short-lived. Rising oil prices, driven by ceasefire uncertainty, provided a counterbalance by lifting heavyweight energy producers. The FTSE 350 energy index rose about 1%, cushioning broader market weakness given the FTSE 100's significant weighting in oil and gas companies.
However, this support was offset by pressure on rate-sensitive domestic sectors. Gilt yields moved higher, reversing some of the previous day's decline and weighing on housebuilders, which fell about 0.9%. Sterling strengthened as traders increased their expectations for Bank of England tightening, pricing in around 40 basis points of further moves by year-end compared to roughly 32 basis points a day earlier. A monthly survey from the Royal Institution of Chartered Surveyors highlighted a sharply contracting UK housing market, adding to the strain on domestically exposed shares.
