The FTSE 100 fell on Tuesday in a broad global equity retreat that saw European equity indices accelerate losses started in Asia.
The FTSE 100 was off by 0.65% at 7,564 whilst the German DAX was weaker by 1% at 15,773. US futures were also down heavily with S&P 500 futures pointing to a 1% lower start.
The selling can be attributed to a shift in the market’s opinion of how many times the Federal reserve will hike rates this year, and what this will mean for the economic outlook and investor positioning.
This change in opinion was particularly evident in the tech-heavy NASDAQ which gave up around 1.8% in the premarket on Tuesday.
Tech shares thrived in the period of easy monetary policy during the pandemic. However, this period of easy monetary policy is now set to be replaced by a tightening cycle that makes tech shares less attractive, given increasing bond yields.
The US 10-Year Bond Yield was 1.827% at the time of writing on Tuesday morning, having touched the highest level since the beginning of the pandemic earlier in the session.
After a string of comments from Fed members about the pace of rate hikes, there is now a fierce debate about how many rate hikes there will be this year. This is unnerving markets any asking questions of assets with valuations perceived to have become frothy over the past two years.
FTSE 100 shares
FTSE 100 shares tracked global equities lower with 77 of the 100 constituents trading underwater on Tuesday.
Precious metals miner Polymetal was the top faller – down 4.2% – as investors reacted to a falling gold price. Interest rate hikes aimed at controlling inflation will likely be bearish for gold in the coming year as its attractiveness as an inflation-hedge diminishes.
“Despite the spike higher in US Treasury yields, spot gold seems to be holding its own above $1,800 for the time being,” said Han Tan, chief market analyst at Exinity to Reuters.
“However, the higher Treasury yields go, that should test bullion’s ability to tread water above the psychologically-important $1,800 mark.”
Also among the fallers were housing and construction shares which felt the pressure of further interest rates hikes in the UK, following strong jobs figures released by the ONS.
There are now over 400,000 more jobs in the UK than prior to the pandemic – a key indicator for the Bank of England and the Monetary Policy Committee who votes on interest rates.
Oil shares were among the top riser as oil approached $100 on rising geopolitical tensions. BP was stronger by 1% whilst Shell gained 1.5%.