The FTSE 100 reached a file excessive in May: Why has it fallen since?
- Investors weigh economic data to judge the timing of interest rate cuts
The FTSE 100 has fallen from record highs achieved earlier in May as investors have pushed back expectations of when central banks will begin cutting interest rates.
Britain’s blue-chip index achieved record highs multiple times over the space of a short period, peaking at an intra-day high of 8,474.71 on 15 May, which marked a 9.4 per cent gain since the start of the year.
The index has fallen roughly 3 per cent since then, derailing a rally driven by a buoyant equity market globally amid the prospect of looming interest rate cuts.
Investors now expect the Bank of England will hold off on cutting rates until August, while the Fed is expected to start cutting in September
Why has the FTSE 100’s momentum stuttered?
While equities have performed reasonably well globally this year a key driver of UK market momentum heading into May had been positive domestic economic data.
But a higher-than-expected inflation print for April pushed back market expectations for the Bank of England’s first interest rate cut from June to later in the summer.
A looming general election, though largely shrugged off by investors in the wake of its announcement, is also putting a cap on UK risk appetite.
However, the FTSE 100 is not alone among global equity market peers in seeing recent gains capped.
The major driver of this has been a focus on the Federal Reserve’s fight against US inflation, which continues to prove far stickier than hoped – thereby pushing back expectations for when the world’s most influential central bank will begin cutting rates to much later in the year.
The FTSE 100 rose to record highs in mid-May but has fallen back since
Markets now expect the European Central Bank, followed by the BoE, to leapfrog the Fed in the race to cut rates first.
The US market’s exposure to investor hype over artificial intelligence is helping maintain equity momentum domestically but it is having an impact on US Treasury yields, which is affecting sentiment elsewhere.
Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown, said: ‘Treasury yields have risen to four-week highs, following relatively cautious comments from the Federal Reserve about the interest rate cutting cycle, which has dented market confidence.’
What could reignite FTSE 100 momentum?
All eyes will turn to the Fed on Friday as it publishes its preferred inflation gauge, the personal consumption expenditures (PCE) price index.
Economist forecast headline and core PCE to remain at 2.7 and 2.8 per cent, respectively, for April.
Any figure below that would likely be well received by markets as it suggests that inflation is returning to target levels and the Fed can therefor consider cutting interest rates.
But any figure much higher than forecast would entrench the view that inflation could be reaccelerating, further delaying the Fed’s first rate cut – and potentially bringing another rate hike back into contention.
This would likely be received badly by investors, potentially driving Treasury yields higher and further denting equity market confidence.
Mark Haefele, chief investment officer at UBS Global Wealth Management, expects US inflation to continue to fall and Treasury yields to fall in turn.
He said: ‘We continue to believe that US sovereign yields should end the year lower as inflation and economic growth slow and the Fed cuts rates in the last months of the year.
‘The Fed remains on track for policy easing later this year.
‘With a softening labour market and slowing economic growth, we continue to expect the Fed to start policy easing in September, with a total of 50 basis points of rate cuts this year.’
Hargreaves Lansdown’s Lund-Yates added: ‘The reality is there’s no immediate catalyst for the UK market to perk up and it will remain firmly in the hands of improved macroeconomic news.
‘Rishi Sunak’s promise to deliver interest rate cuts if he wins the upcoming election won’t be a potent enough prospect to lift the mood just yet.’
How have different assets performed so far this year?
