Global financial markets fell on Wednesday after the United States and Iran carried out their most significant exchange of strikes since a ceasefire was agreed in April, compounding investor anxiety ahead of American inflation figures that confirmed prices are rising at their fastest pace in over three years.

The US launched strikes against Iran after President Donald Trump blamed Tehran for shooting down an American military helicopter near the Strait of Hormuz. Iran responded with retaliatory strikes, with Tehran stating it had targeted sites in Kuwait, Bahrain and Jordan. The sequence of events sent a fresh wave of unease through markets that had already been contending with months of elevated energy costs since the conflict began.

Asian markets bore the sharpest immediate losses. South Korea's Kospi index fell approximately 6%, while Japan's Nikkei dropped 2%. European indices followed, though with more restraint. London's FTSE 100 fell 0.5%, the German Dax shed 0.6% and France's Cac 40 declined 0.3%. US futures were pointing lower ahead of the afternoon inflation release, with S&P 500 contracts down 1.1% and Nasdaq futures off 1.6% before trimming losses once the data landed in line with forecasts.

US consumer prices rose 4.2% in the year to May, up from 3.8% in April and the third consecutive monthly acceleration since the conflict in Iran began. Energy prices were the primary driver, climbing 23.5% year on year. Food prices rose 3.1%. Core inflation, which strips out food and energy, came in at 2.9%. The figures place the Federal Reserve in a difficult position. Raising interest rates to suppress inflation risks political friction with the White House, yet sustained energy-driven price rises are spreading into the broader economy. Analysts at Hargreaves Lansdown noted that the 4.2% headline reading, if confirmed, would be the highest since April 2023.

Oil prices behaved unexpectedly given the scale of the overnight exchanges. Brent crude fell 0.2% to $91.28 a barrel, having briefly dropped below $90 the previous day. Analysts attributed this to markets no longer pricing in a worst-case escalation. A scenario of $150 per barrel, which had circulated earlier in the conflict, is now considered increasingly remote. Uncertainty over peace negotiations and the effective reopening of the Strait of Hormuz is expected to keep some risk premium in place, though momentum in monthly price rises has slowed noticeably.

Germany's DIW economic research institute revised its outlook downward, warning that Europe's largest economy faces a technical recession this year. The institute now expects output to contract in both the second and third quarters, though it still projects marginal annual growth of 0.5% for the year overall. Its head of forecasting described the situation as a noticeable drag on recovery, while drawing a distinction from the more severe disruption of 2022 and 2023.

In Britain, travel retailer WH Smith announced plans to raise approximately £100 million through a share placement, citing the impact of the Middle East conflict on passenger numbers and consumer spending. The company cut its pre-tax profit forecast for the year to between £75 million and £90 million, down from a previous range of £90 million to £105 million, and flagged a £150 million writedown connected to its North American business and restructuring activity. It was the second profit downgrade this year. Shares fell around 16% on the news.

Not all corporate news was negative. Pub and hotel group Fuller, Smith and Turner reported revenues and profits ahead of expectations, with revenue reaching £398 million and pre-tax profit at £29.5 million. The company said advance bookings for the World Cup have been strong and that its summer trading has started well, with like-for-like sales up 4.4% in the first ten weeks of the new financial year.

Analysts at Deutsche Bank noted that markets are simultaneously navigating geopolitical risk and sharp swings in technology sector sentiment, with the Philadelphia Semiconductor Index at one point falling nearly 9% intraday before recovering. How persistently elevated energy costs feed through to core prices over the coming months will determine the Federal Reserve's next move and the broader direction of markets through the summer.

‍