The FTSE 100 Index retreated for four consecutive days as UK government bond yields surged and after HSBC published a weak financial report. It dropped to £10,225 on Tuesday, down sharply from the year-to-date high of £10,935.
Soaring UK Gold yields
A key reason why the FTSE 100 Index pulled back is that UK bond yields, commonly known as Gilts, are in a strong uptrend. Data shows that the ten-year yield rose to 5.10%, its highest point since March this year. Most notably, the 30-Year yield rose to 5.80%, its highest point in over 30 years.
UK bond yields are rising amid concerns about the British economy as inflation surges, leading the Bank of England to consider hiking interest rates in the next meeting.
This will be a tough rate hike considering that the economy is largely in a stagflation period, which is characterized by rising inflation and slow economic growth. Also, it will dramatically boost the cost of financing the UK government debt.
The stock market tends to underperform when government bond yields are rising. In most cases, investors normally argue that it is safe to invest in the higher yield in the bond market.
To be clear: long-term government bond yields have jumped sharply in the past few weeks, with the US one moving comfortably above the 5% gauge for the first time in months.
HSBC earnings dragged UK stocks
The FTSE 100 Index also dropped because of the ongoing HSBC share price plunge after it published weak financial results. Its stock plunged by 6%, making it one of the worst performers in the index. This crash dragged the other UK banks, even those that released strong results like Lloyds, Standard Chartered, and NatWest.
In its report, the company said that it suffered a $400 million loss linked to Market Financial Solutions, a top UK company that collapsed a few months ago. Investors are now examining its exposure to the booming private credit sector. In a statement, it said that it has a $111 billion exposure to the industry.
HSBC reported a pre-tax profit of $9.4 billion, lower than the $9.59 billion that analysts were expecting.
Looking ahead, the FTSE 100 Index will react to earnings from companies like Smith & Nephew. Flutter Entertainment, JD Sports, Coca-Cola, InterContinental Hotels, and IAG Group.
FTSE 100 Index technical analysis
FTSE 100 Index chart | Source: TradingView
The daily timeframe chart shows that the FTSE 100 Index has pulled back in the past few weeks, moving from a high of £10,716 in April to £10,210 today.
A closer look shows that it has formed a double-top-like pattern whose neckline is at £9,670, its lowest level on March 23rd.
The index has already crashed below the 50-day Exponential Moving Average, a sign that bears are gaining momentum. The Relative Strength Index (RSI) has continued falling and is now hovering below the neutral level.
Therefore, the index will likely continue falling in the near term as the crisis in the Middle East continues. If this happens, the next key level to watch will be at £9,500. On the other hand, a move above the resistance at £10,500 will invalidate the bullish outlook.
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