The FTSE 100 sank on Thursday as bond yields marched higher, raising fears of higher interest rates globally, particularly in the US where odds of an October hike were increasing.
Sentiment shifted sharply overnight after falling oil prices and US inflation data yesterday sparked a sense of optimism. Today’s 1.5% drop in the FTSE 100 reflects concerns that although oil was flowing out of the Middle East, it wasn’t coming in fast enough to offset months of lower supply.
“While there are signs that an increased flow of oil is getting through the Strait of Hormuz, Brent crude hovered around $100 per barrel on the continuing war of words between the US and Iran,” said AJ Bell investment director Russ Mould.
“Despite US inflation data which came in softer than anticipated yesterday, government bonds continued to sell off, revealing significant twitchiness among investors. The yield on US 10-year Treasuries hit its highest level since the launch of American Idol in 2002.”
The pressure also hit UK gilt markets, where the long end is hitting multi-year highs and sapping enthusiasm for risk assets such as FTSE 100 stocks. It also undermines the UK government’s growth agenda.
“The 30-year gilt passed above 6% for the first time since January 1998, sending alarm bells ringing. Prime Minister Andy Burnham and Chancellor John Healey already have enough on their plate without a rapid increase in government borrowing costs since they took office. Gilt yields moving at such a pace presents a major challenge for their spending and borrowing plans,” Mould said.
All but six FTSE 100 companies were trading in the red at the time of writing.
FTSE 100 financials were hit hard by rising yields, with Lion Finance dropping 4%, HSBC 3.2%, NatWest 2.9% and M&G 2.5%.
Lloyds shares fell 2.5% back towards the 100p mark and IG dropped 2.5% below a key level of support.
Games Workshop was the FTSE 100’s top faller, sinking 4.5% as the tabletop gaming firm fell to its lowest level since March.
Some positive corporate stories emerged on Thursday, but the wider sell-off drowned them out. SSE reaffirmed guidance as energy generation ticked up, but shares dropped 1.2% in line with the wider market decline.
“SSE is powering ahead on the back of strong trading, with heavy investment in regulated networks and a healthy increase in renewable generation highlighting the strength of the business,” explained Axel Rudolph, Chief Technical Analyst at IG.
“The group remains firmly on track with its guidance, while continued investment should support growth across its networks and renewables operations. With the energy transition requiring ever greater spending on infrastructure, SSE looks well placed to benefit from the long-term investment cycle.”