The FTSE 100 is down nearly 500 points in October alone with sharp declines being recorded in the past few days.
Many FTSE 100 companies are testing 52-week lows and heading towards key technical supports, while the overall index is set to test the psychological level of 7000.
Here are some of the reasons why.
US Bond Yields are rising
Investors have two options when investing in securities; to invest in the equity of companies or invest in fixed income debt, either in the form of corporate bonds or governments bonds.
Listed equities can provide potentially higher capital appreciation returns in the long term but can be extremely volatile in the short term and are considered higher risk than bonds, especially benchmark government issued bonds of the UK, US and Japan.
US government debt is seen as the safest asset in the world as you are ineffective lending to the US government. If they weren’t to pay you back there would be a global economic meltdown worse than the 2008 financial crisis.
Those lending to the US government today can lock in yields above 3% and this has been slowly rising for some time leading investors to shun risky listed equities in favour of low risk government debt, which now has an attractive yield higher than the average dividend you’d receive for a leading equity index.
Why would a fund manager hold Whitbread or Experian near all time highs for a 2-2.5% yield when they can invest in 10-year government bonds and receive 3%?
Oil is retreating
Oil futures sank on Thursday morning following a rise in US crude inventories. The FTSE 100 is highly weighted towards commodities with constituents such as BP and Shell accounting for a large proportion of the index.
The American Petroleum Institute reported a 907k jump in oil inventories suggesting supply was again starting to exceed demand. This hit both Brent and WTI oil prices heavily despite the Hurricane Michael making land fall in Florida.
BP and Shell are down 7.2% and 6.3% respectively in October representing a major drag on the wider FTSE 100 index.
With Iran oil sanctions largely priced in there aren’t any major geopolitical risks on the horizon to keep the bulls in the game, exacerbating the recent decline.
Italy are playing chicken with Brussels
The Italian administration is testing the nerve of Brussels with budget plans for a deficit representing 2.4% of GDP.
The market have reacted with the selling of Italian bonds se ding the spread between 10 year Italian bonds and benchmark German Bunds to around 300 basis points (3%).
Rising bond yields mean the Italian government’s payments will rise putting further pressure on their finances.
This has spooked investors in Europe leading to a broad-based selling in European equities, including the FTSE 100.