The exuberance which washed over financial markets after energy prices dipped slightly has faded, with renewed attacks in the Middle East demonstrating how a resolution to the crisis remains elusive. The Footsie was on the back foot in early trade as investors assessed the inflationary pressures hanging over markets, and the unpalatable central bank medicine which may have to be administered.

However, Wall Street looks set for a broadly flat open, with the current febrile environment seemingly taken in investors’ stride as the new normal. The markets are still pricing in mammoth advances in AI spending across the globe, keeping tech giants buoyant and indices at record levels. Brent crude has risen back above $101 a barrel following attacks by Yemen’s Houthi rebels on targets in southern Saudi Arabia, with the fresh escalation reviving concerns about the security of energy supplies.

Attacks on ships in and around the Strait of Hormuz have also ramped up, with multiple incidents reported by the UKMTO this week, a Royal Navy-led maritime security monitoring service which has become a key source of information for shipping companies concerned about security. It’s clear that traversing the Strait remains dangerous, even though more tankers have been making passage through the waterway.

Sharply higher insurance prices are reflecting this, while longer wait times and deviations are also adding to costs borne by freight companies, alongside more expensive fuel. Some of those higher costs are likely to feed through to consumers, adding to inflationary pressures which central banks are grappling with. The Reserve Bank of India has hiked rates for the first time since February 2023, with the repo rate rising 25 basis points to 5.5%. India, a major energy importer, is particularly exposed to the spike in energy costs, and companies are passing on higher overheads to consumers, unable to continue absorbing the financial burden. Investors are bracing for more central banks to follow suit.

With financial markets pricing in a more than 90% chance of a quarter-point Bank of England rate rise after its November meeting, and three further rises in 2027, cheaper mortgage deals have evaporated, creating deep uncertainty for the UK housing market. Lloyds data shows house prices were flat in September, after recording their first annual fall since 2023 in August. On a quarterly basis, prices were down 0.2%, as higher mortgage rates put pressure on the market. The worry is that this is a lull before another decline in prices, as buyers baulk at taking on bigger loans, especially with higher energy bills landing and the prospect that food prices may also escalate.

For now, the housing market appears to be balancing buyer caution with continued underlying demand. New enquiries from prospective mortgage borrowers were coming in at their fastest pace since February, according to Lloyds, suggesting that higher borrowing costs are making buyers more cautious rather than driving them completely from the market.

Shell is among the risers in early trade as the repercussions of the conflict create strong demand for gas, oil and refined products. Attacks on energy infrastructure in the Middle East and Russia have contributed to a squeeze in fuel markets, and Shell is reaping some of the benefits. It has raised its third-quarter Integrated Gas production forecast to between 740,000 and 780,000 barrels of oil equivalent per day, well above the 631,000  produced in the second quarter.   The acquisition of ARC Resources was well timed, given that its operations have added materially to output at a time of acute demand. With diesel in such short supply, leading to eye-watering prices at the pumps, Shell’s refining margins have nearly doubled, rising to $42 per barrel in Q3 from $24 per barrel in Q2.

The pressure on government finances is becoming increasingly visible across the Channel, with France grappling with higher borrowing costs alongside a wave of unrest and protests. Student rallies have turned violent as they demand higher spending on education, just at a time when the public finances are already stretched to breaking point. French bond yields had surged to levels not seen since the early 2000s as investors focus on the country’s precarious fiscal position, although a pledge from National Rally’s Marine Le Pen to find €140 billion in spending savings by 2032 has helped bring borrowing costs down a little. Pushing through that level of cuts, even if the party were to be elected, would be a hugely difficult task, given the level of anger on the streets over current spending pressures.