Can the UK stock market shrug off its association with its battered European counterparts?
Having been dragged down by its European peers amid last week’ European election sell-off, can the FTSE 100 shrug off its association with neighbouring stock markets and begin a summer rally?
After all the UK blue chip index gained around a percentage point on Thursday following the Bank of England’s (BoE’s) latest Monetary Policy Committee (MPC) decision at which interest rates remained unchanged at 5.25%. While two committee members voted for a 25-basis point (bp) rate cut, the majority of seven members opted to leave rates steady, just as they did at the last MPC meeting.
In the meeting minutes, the central bank indicated that the upcoming August Quarterly Economic Forecast will be key in determining the future path of interest rates. Specifically, the bank stated it will evaluate the extent to which inflation risks have receded with its governor Andrew Bailey mentioning the “need to be sure that inflation will stay low.” If those risks continue to diminish, the bank hinted it may cut rates at its next meeting in August despite stubbornly high services inflation at 5.7% in May.
UK and US services inflation chart
As can be seen on the above chart, UK services inflation is even higher than in the US which needs to deal with the same fly in the ointment.
Financial markets are now pricing in around a 45% probability of the BoE lowering interest rates in August, as inflation pressures ease. The August forecast meeting will therefore be pivotal in deciding whether monetary policy should remain at its current stance, or require loosening. This compares to a 66% chance of seeing a September US Federal Reserve (Fed) rate cut.
The fact that MPC members tend to vote in blocks when it comes to changing their view, the current 7:2 split in the votes for UK interest rates to remain unchanged could swiftly swing to a majority of members favouring a rate cut at the BoE’s August meeting, especially since the central bank doesn’t seem overly concerned with its up-to-two year view regarding services inflations which they expect to gradually fall over time.
FTSE 100 and FTSE 250 and other stock indices comparison chart
Despite investors buying into the historically undervalued UK stock market this year, propelling it to a record high in May, it continues to underperform its peers. The FTSE 250 gained roughly 5% year-to-date, the FTSE 100 7% but that is still less than the Euro Stoxx 50 at over 9% and US indices such as the S&P 500 and Nasdaq 100 which show double digit gains as they continue to trade in all-time highs.
An uncoupling of the UK stock market’s performance form that of its European peers thus looks unlikely.
Can the FTSE 100 build on Thursday’s rally?
Thursday’s around 1% gain in the FTSE 100 took it through its May-to-June downtrend line, a near two-week high at 8,288 and close to its 7 June high at 8,305. This level, and ideally also the early-June peak at 8,364, will need to be bettered on a daily chart closing basis, for a summer rally to become plausible.
With the S&P 500 trading around the 5,500 mark and the Nasdaq 100 flirting with the 20,000 level, both round numbers and thus potentially resistance zone, US indices may lose some of their recent upside momentum. After all the Dow Jones Industrials Index topped out at its all-time high, made around the 40,000 mark only a month ago.
With this in mind, it may difficult for the FTSE 100 to regain further recently lost ground and hit new record highs anytime soon.
Having said that, as long as the April-to-June uptrend line at 8,155 and, more importantly, the current June low at 8,111 underpin, further range sideways trading with a potentially bullish bias may ensue over the coming weeks.
FTSE 100 Daily Candlestick Chart
Were the June low at 8,111 to give way, though, the early April-high at 8,017, together with the psychological 8,000 region, would be back in the frame.
