The FTSE 100 fell on Monday as pressure on UK assets continued following a broad sell-off in US equities after the release of December’s Non-Farm Payrolls.
The downward spiral in UK bonds and the pound has accelerated since the US jobs number which suggests the Federal Reserve will be in no rush to cut rates and may not amend rates until late 2025.
“Equity trading on the London market has got off to a subdued start as investors continue to assess the implications of turmoil on the bond markets and the outlook for the global economy. Friday’s jobs figures showed the US economy is more resilient than expected, quashing hopes for multiple interest rate cuts from the Federal Reserve this year,” said Susannah Streeter head of money and markets, Hargreaves Lansdown.
Streeter continued to explain how developments in the US were making the UK effectively powerless against the factors causing volatility in UK assets.
“With the dollar strengthening against a basket of currencies it also runs the risk of higher inflation being exported, due to the higher cost of imports, adding to headaches for other central banks. UK government borrowing costs have crept up even higher, with the yield on 10-year gilts nudging 4.9%, a highly unwelcome hurdle, levels not seen since the Great Financial Crisis.”
Higher bond yields will be a major concern for investors in most industry groups, baring the banks that enjoy higher interest rates.
That said, the visible positioning moves made to portfolios by selling down utilities and retailers and buying banks last week were less pronounced on Monday.
However, the falling pound failed to inspire any major buying activity in London’s leading stocks, leaving the index languishing in negative territory.
“The dollar is flexing more muscle amid expectations that borrowing costs will stay higher for longer, helping push down the pound to $1.21 levels not seen since October 2023. Sterling has also dipped against the euro to 1.18. It comes amid ongoing concerns about the outlook for the UK economy, with the spectre of stagflation hovering,” Streeter said.
IAG was among the top fallers as investors booked profit after a steady ascent for the share price in recent months. Surging oil prices may have prompted some investors to take profit in IAG as fresh sanctions on Russia sent WTI oil 2% higher.
“Crude oil futures continued to advance, driven by expectations that expanded U.S. sanctions could disrupt Russian crude exports to key buyers, China and India,” said Joseph Dahrieh, Managing Principal at Tickmill.
“The sanctions target major Russian oil producers and vessels involved in transporting Russian oil, aiming to reduce Moscow’s oil revenue. This reduction in Russian exports could push global crude prices higher at least in the near term, as the market adjusts to the loss of supply from one of the world’s largest oil producers.”
London’s weighting towards oil helped the FTSE 100 outperform European indices with BP and Shell gaining more than 1%.