Earlier this year as a result of the coronavirus pandemic, the FTSE 100 marked its worst quarter since 1987, losing around 25 per cent of its value. The biggest losers were travel and leisure stocks, dropping up to 45 per cent due to falling demand and tougher restrictions.
Even though the FTSE 100 started to rise steadily as the UK economy reopened, fears of a ‘second wave’ plunged the index below the 6,000 points barrier again, as investors re-evaluated their exposure to risk assets.
Despite some recent gains, it looks like the FTSE 100 intends to bottom around the 5,600 level.
“Long positions shall continue to fall short of targets”
According to Alistair Strang from Trends and Targets, the FTSE 100 is not in a good place.
“The index does require above 6,200 points to escape this immediate danger and we suspect, while the threat remains, short positions shall continue to outperform whereas long positions shall continue to fall short of targets,” he said.
“No-one ever said the market is a simple place, but we feel it wise to tailor expectations in accordance with the market’s mood. Grimly holding on for a long target level to appear risks disappointment, if the index changes direction before reaching whatever ambition was in place.”
Strang believes that the immediate situation suggests strength above 6,034 points should make an attempt at an initial 6,103 points. If mischief is planned, the FTSE must drop below 5,942 points, because this could trigger reversals to an initial 5,891 points.
The impact of unemployment and pound sterling
According to official figures, the UK unemployment rate has now risen to its highest level for two years. The unemployment rate grew to 4.1% in the three months to July, compared with 3.9% previously.
Some 695,000 UK workers disappeared from the payrolls of British companies since March, when the coronavirus lockdown began. Young people are among the worst off, with those aged 16 to 24 suffering the biggest drop in employment compared with other age groups.
These figures don’t bode well for the UK economy and will only add fuel to the fire of fear that another stock market crash looms large.
One glimmer of hope is the performance of pound sterling, which recently suffered a big drop in value due to growing anxieties that a ‘no deal’ outcome to Brexit trade negotiations was on the horizon. The Pound-to-Euro exchange rate fell 3.72%, the Pound-to-Dollar exchange rate fell 3.62%, while the Pound-to-Australian Dollar exchange rate shed 3.56%.
The FTSE 100 will hope that a predicted recovery in the pound over the coming months is delayed, as this will create further downwards pressure on the index.
FTSE 100 success stories
In defiance of the doom and gloom, food retailers such as Ocado spearheaded recent FTSE 100 optimism. Shares rose to their highest point ever, as Marks & Spencer products proved far more popular than Ocado’s old partnership with Waitrose.
Supermarket chains were little moved either, holding firm in spite of a dip in sales due to the government’s Eat Out to Help Out scheme.