London’s blue-chip index fell more than 7% in March
A member of staff poses next to a trading board at the London Stock Exchange (Image: Getty Images)
The FTSE 100 experienced its most severe month since the pandemic in March after the United States’ conflict in the Middle East triggered a historic market response, resulting in spiralling government borrowing costs and oil prices undergoing their largest single-month surge on record.
Despite a relief rally on Tuesday, London’s blue-chip index declined over seven per cent throughout the month when Donald Trump and Israel’s attack on Iran escalated into the Middle East’s most serious regional conflict this century.
Markets have fluctuated dramatically since the end of February, with growing speculation about whether the Strait of Hormuz, a crucial shipping route out of the Persian Gulf that typically channels a quarter of the world’s seaborne oil supplies and a fifth of its natural gas, might be reopened.
The strait’s effective closure has led to a period of intense strain in energy markets. Brent crude – the global benchmark for oil prices – recorded its largest single-month increase on record, while WTI crude rose similarly steeply.
Brent, which traded at historic lows for much of 2025, increased more than 50 per cent in March to exceed $100 a barrel for the first time since Russia’s invasion of Ukraine. The commodity concluded the month at $107/barrel, meaning its gains for March narrowly surpassed the previous monthly record set in 1990 when Saddam Hussein invaded Kuwait, as reported by City AM.
Jose Torres, senior economist at Interactive Brokers, said: “President Trump’s attempts to inject calm into markets appear to be losing impact each time.”
The hostilities have also triggered a dramatic reassessment of the interest rate trajectory, causing the Government’s short-term borrowing costs to endure their worst month since Liz Truss’s ill-fated mini-Budget. The yield on the two-year gilt, amongst the most frequently issued UK bonds, jumped by almost a full percentage point throughout March, erasing billions from the Chancellor’s fiscal headroom.
Before the outbreak of hostilities, traders had anticipated the Bank of England would reduce its central interest rate three times during 2026, amidst a rapidly deteriorating labour market and a more moderate inflation outlook. However, fearing the escalating energy prices would push up costs across the broader economy, investors completely reversed those expectations, with markets now forecasting between three and four interest rate rises before year-end.
Britain’s government bonds experienced the most dramatic fluctuations amongst developed nations. Experts have suggested temporary price increases are less probable in the UK due to its range of regulated sectors and exposed energy market. The damaging sell-off in shorter-term gilts also triggered a cascade of concerns regarding the UK’s fiscal viability, prompting longer-dated bonds to face pressure from traders as well. The 10-year gilt yield rose marginally above five per cent for the first time since the global financial crisis, while 30-year gilts remain at levels unseen this century.
Kathleen Brooks, research director at XTB, described the bond market movements as “astonishing” and contended in a note that the government bore some responsibility.
“It is unwilling to cut fuel duty or VAT on fuel in this environment. Instead it is blaming price gouging by petrol forecourt owners,” she said.
“There is absolutely no evidence of this, and the RAC has reported that forecourt owners only make a slim six per cent profit margin on a litre of fuel. It is the government’s coffers who line their pockets during an energy price shock.”
The month has brought a sudden stop to what had been an impressive performance for UK assets, with both equities and government bonds experiencing a robust first quarter in 2026.
The FTSE 100 surpassed the 10,000-point threshold for the first time in its history in January, continuing a remarkable run from 2025 when it was the world’s top-performing major index. Fuelled by investors’ appetite for exposure to mining and the striking valuations, the index continued to set a series of new records, nearing the 11,000 points mark just before the conflict.
Government bonds also saw a rally into 2026, driven by expectations of interest rate reductions and several indications that ministers were prioritising managing the public finances.
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