The FTSE 100 Index has come under pressure in the past few weeks, moving from a high of 10,990 in July to the current 10,523. This retreat has continued as UK government bond yields have remained at an elevated level. Focus now shifts the upcoming earnings season, which will provide more color on corporate earnings growth.
FTSE 100 slips as UK bond yields drop
The FTSE 100 Index has dropped in the past few months as UK government bond yields surge. Data shows that the ten-year gilt yields have soared to 5.45% from the year-to-date low of 4.235%.
The same is happening with short-term government bonds, where the five-year yield has risen to 5%, and the two-year has moved to 4.858%.
The same trend is happening in other countries like the United States, France, and Germany. For example, in France, the ten-year has jumped to 4.87%, while in Germany, it moved to 3.50%.
The UK bond yields are rising because of rising budget deficits and public debt. Its total public debt has jumped to about 3 trillion, which is about 95% of annual GDP. Also, the budget deficit has continued to widen, while economic growth has stalled.
Historically, stocks tend to deteriorate whenever there are jitters in the bond market. This is one reason why top indices like the German DAX and French CAC 40 have remained modestly below their highest levels this year.
UK stocks are also being hit by the ongoing crisis in the Middle East that has pushed energy prices higher. Brent, the global benchmark, has risen to $101.75, while the West Texas Intermediate (WTI) has risen to $90.
Odds of a BoE rate hike are rising
The rising oil prices have led to higher inflation in the country. Recent data released by the Office of National Statistics (ONS) showed that the headline Consumer Price Index (CPI) rose 3.1% in August from 2.9% in July. Core inflation, which excludes the volatile food and energy prices, rose 2.6%.
Therefore, there is a risk that the Bank of England (BoE) will hike interest rates in the upcoming meeting in November.
The other catalyst for the FTSE 100 Index will be the upcoming US and UK earnings season that starts next week. Top US banks like JPMorgan, Morgan Stanley, and Bank of America will publish their earnings.
Other top UK companies will also start publishing their earnings later this month. Some of the top names to watch will be companies like Lloyds Bank, Shell, Unilever, IG Group, Intercontinental Hotels, and London Stock Exchange.
FTSE 100 Index technical analysis
Footsie chart | Source: TradingView
The daily chart shows that the Footsie Index has been under pressure in the past few weeks. It has slumped from a high of 10,990 in July to a low of 10,387.
It has already moved to the 38.2% Fibonacci Retracement level. At the same time, it has slipped below the 50-day Exponential Moving Average (EMA). On the positive side, it has formed a falling megaphone pattern, which is usually a bullish reversal sign in technical analysis. For now, the index will likely remain under pressure and then bounce back eventually.
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