The FTSE 100 was feeling the pressure of higher bond yields on Tuesday as US 10-year treasury yields touched 4.75% amid concerns about the trajectory of interest rates.
The latest bout of concern was sparked by a raft of strong US economic data suggesting the world’s largest economy is taking higher rates in its stride.
“The hangover from strong economic data out in the US is still being felt, with the headache increasing about the likelihood of high interest rates setting in rattling nerves. Better than expected manufacturing indicating a more buoyant US economy is not being taken as good news, but a sign that the bitter central bank medicine will have to keep being administered to bring down inflation to target,” said Susannah Streeter, head of money and markets, Hargreaves Lansdown.
Those hoping interest rates had peaked may be disappointed if this trend continues and inflation remains elevated. The ongoing concerns about interest rates are weighing on markets that are starting to show signs of monetary policy fatigue.
“Stubbornly high US government bond yields are making life harder for equities to press ahead. The US Treasury yield exceeded 4.7% overnight as investors took the view that the US economy is in a decent and resilient shape,” said Russ Mould, investment director at AJ Bell.
“While a robust economy would be positive, it theoretically lowers the chances of the Federal Reserve making interest rate cuts in the near-term or at least fewer cuts than previously expected.”
The FTSE 100 was down 0.3% to 7,488 at the time of writing.
“A risk-off sentiment is growing, and the FTSE 100 is finding it hard to regain its mojo,” Streeter concluded.
In terms of FTSE 100 movers, consumer-facing and highly cyclical sectors received the brunt of the selling on Tuesday. Miners were weaker and were Burberry and JD Sports.
Ocado’s free fall continued as hopes of a bid from Amazon becomes a distant memory. Ocado shares were down 4.5% and were the biggest loser on Tuesday.
There was a distinct risk-off rotation in FTSE 100 stocks with defensive names including GSK, Unilever and Pearson in favour.