The FTSE 100 fell on Wednesday as Brent Crude oil prices rose above the $100 mark and bond yields increased, raising concerns of interest rate hikes.
Despite a heavy weighting towards oil companies benefiting from the rise, the potential impact on borrowing costs for governments and households was too much for equity traders to stomach, and the FTSE 100 dipped 0.5% on Wednesday.
“Brent crude pushing above $100 a barrel has had a psychological effect on the market, pushing a hypothetical inflation worry gauge to ‘serious’ status and dragging down financial assets,” said Dan Coatsworth, head of markets at AJ Bell.
“The oil price has now jumped by 28% since early August. This type of ascent could leave businesses and consumers feeling sick at the thought of sharp cost increases and potentially higher borrowing costs if central banks choose to fight inflation with interest rate hikes.”
Investors will also be concerned that bond yields are reacting to rising oil prices as a function of inflation concerns.
“Bond yields moved higher in reaction to oil’s ongoing ascent and what that could mean for interest rates,” Coatsworth said.
“The 10-year gilt briefly hit 5.129% while the 30-year gilt topped 5.824% before easing back slightly. The longer this trend remains in motion, the smaller the Budget headroom for new chancellor John Healey. Rising borrowing costs will put more pressure on the government to consider tax rises, spending cuts or both.”
These risks were felt in consumer-facing companies. Autotrader was the FTSE 100’s top loser, down 3%, while Games Workshop fell 2%. Banks were also on the back foot, with Barclays giving back 1.7% and Lloyds dipping 1.2%.
Aberdeen Group was the FTSE 100’s top riser after appointing Torbjorn Magnusson as its new chair. Computacenter rose 2% as investors bought into yesterday’s dip.
Rising utilities such as Centrica, SSE and National Grid underscored the risk-off sentiment on Wednesday.
BP benefited from rising oil prices, ticking 1.5% higher. Shell added only 0.8%. That wasn’t enough from the pair to support the index.