FTSE 100 Forecast: More Losses Likely on UK Political Turmoil

[MongiIG]

FTSE 100 PRICE, NEWS AND ANALYSIS:

• The FTSE 100 index looks likely to underperform other major stock market measures.
• That’s due, at least in part, to political problems engulfing the UK Prime Minister.

 

FTSE 100 INDEX MAY UNDERPERFORM

The FTSE 100 index of leading London-listed stocks will likely underperform the other major world indexes as political turmoil in the UK undermines confidence. Late Tuesday, nearly 100 Members of Parliament from the ruling Conservative Party rebelled against the Government on the issue of Covid passes in England.

The measure introducing them was passed with support from the opposition Labour Party but the vote still undermined the authority of Prime Minister Boris Johnson, who is already under attack on issues ranging from who paid for the refurbishment of his Downing Street flat to reports of parties last Christmas against the Covid rules then in force.

Such political instability is generally not received well in the markets, and while the FTSE 100 index was only marginally lower in early Wednesday trade, further losses would be no surprise.

FTSE 100 PRICE CHART, ONE-HOUR TIMEFRAME (DECEMBER 8-15, 2021)

Source: IG (You can click on it for a larger image)

 

UK INFLATION SOARS

This political turmoil is adding to economic concerns highlighted by the latest UK inflation data, which my colleague Nicholas Cawley reports on here. The figures were substantially worse than expected, with headline inflation up to 5.1% year/year in November – its highest for more than 10 years.

That’s also bad news for UK stocks as it could prompt the Bank of England to increase interest rates Thursday, although that is unlikely as the BoE worries about the economic recovery being slowed down by the Omicron coronavirus variant. Even if it does not raise rates, a hike is likely early next year.

RETAIL TRADER DATA BEARISH TOO

As for the IG positioning figures, the latest retail trader data show59.16% of traders are net-long the FTSE 100, with the ratio of traders long to short at 1.45 to 1. The number of traders net-long is 10.63% higher than yesterday and 51.13% higher than last week, while the number of traders net-short is 11.88% lower than yesterday and 33.61% lower than last week.

Here at DailyFX, we typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests the FTSE 100 may continue to fall. Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger FTSE 100-bearish contrarian trading bias.

 

Written by Martin Essex, Analyst, 15th December 2021. DailyFX