FTSE 100 sinks for second day as interest rate fears rise and Middle East tensions persist

The FTSE 100 was sharply lower on Tuesday as Middle East tensions and the increasing fear about interest rates curtailed demand for equities.

London’s leading index started deep in the red and traded around 1.4% lower for most of the session.

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“The UK market has lost further steam, following rising tensions in the Middle East. The ongoing uncertainty has left its mark on stocks across the globe, with the effect of fear being compounded by a mixed start to earnings season,” said Sophie Lund-Yates, lead equity analyst, Hargreaves Lansdown.

The prominent dynamic worrying investors is the Middle East sparking a rally in oil above $100 that pushes interest rate cuts even further into the distance.

“Oil traders are awaiting the response from Israel after Iran’s airstrikes. The price of Brent crude is back at around $90.5 a barrel, with few catalysts for a de-escalation of the price expected anytime soon. On the demand side, China’s better-than-expected first quarter GDP will be adding further heat to the price,” Lund-Yates said.

Interest rate concerns rose again yesterday after a strong US retail sales reading added to a long list of economic indicators that show the Federal Reserve has no reason to cut interest rates as the US economy takes higher interest rates in its stride and inflation increased in March.

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“The US has seen better-than-expected retail sales, which is fanning the flames of inflationary concern. The possibility of higher-for-longer interest rates has sent treasury yields higher, and further volatility can’t be ruled out,” explained Lund-Yates.

UK unemployment increases

A softer UK jobs market did little to help ease concerns the Bank of England may hold off cutting rates for the foreseeable future as inflation remains above the target rate.

“Despite the labour market cooling, pay inflation remains relatively stubborn and this will concern the Bank of England as it could be a sign of a rising price environment becoming more entrenched,” said AJ Bell head of financial analysis Danni Hewson.

The FTSE 100 declines were broad after the news broke UK unemployment rose to 4.2%, with only six constituents trading in positive territory at the time of writing.

Tuesday’s gainers were predominantly utility companies enjoying defensive flows amid increasing market tensions. Severn Trent, SSE, United Utilities and Centrica were all higher.

Cyclical sectors were taking a beating.

Miners were down despite better-than-expected China GDP data. US tech-focused Scottish Mortgage sank after a poor session in the US overnight.

Lloyds shares were back beneath 50p as UK banks sold off while housebuilders took a step backwards.

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