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FTSE 100 Struggles as Soaring Oil Prices Spark Stagflation Fears, Key Support in Play

FTSE 100 Struggles as Soaring Oil Prices Spark Stagflation Fears, Key Support in Play

Diego Colman, Market Analyst

FTSE 100 OUTLOOK:

  • FTSE 100 struggles at the start of the week amid deteriorating investor sentiment
  • The Ukraine war dominates market psychology and limits appetite for risk assets
  • Rising commodity prices, especially oil, are likely to exacerbate inflationary pressures and weaken economic activity in Europe, casting a shadow over the regional stock market

Most Read: DAX 40 in a Bear Market, FTSE 100 Dragged Down to Key Support

The FTSE 100 tumbled in early trading on Monday, falling about 3% at its worst point, before clawing back most losses to finish the day 0.4% lower near the 7,000 level, in a session marked by explosive volatility amid rising geopolitical tensions in Eastern Europe. With the latest turns and twists, the index sits 9% below its February high, but has so far managed to stay out of correction territory defined by a pullback of 10% or more from a recent peak.

Russia's invasion of Ukraine late last month has shaken financial markets to the core, sending commodity prices soaring and triggering a sharp sell-off in global equities. President Putin's military attack prompted the United States and its allies to impose heavy economic sanctions on Moscow, including the expulsion of certain financial institutions from the SWIFT system and the freezing of the central bank's massive foreign exchange reserves.

So far, the West has not targeted the Russian energy sector, but the White House appears to be pushing for a ban on crude and related products from that country, according to U.S. Secretary of State Antony Blinken. For this reason, Brent built on last week’s rally in the Asian session and soared more than 15%, briefly topping $135 per barrel, the highest level since July 2008, before retracing some gains to trade around the $125 handle.

Higher commodity costs will reinforce inflationary forces and weaken the economic recovery in Europe (stagflation?), casting a shadow over the regional stock market. Although the UK prospects may be slightly better than the EU, due to a more limited trade exposure to Russia, the FTSE 100 is not insulated from trouble and is expected to struggle in the short term.

It is true that the Bank of England may become less hawkish in light of growing geopolitical headwinds, but with the outlook subject to extraordinary uncertainty and volatility on the rise across all assets, a less aggressive monetary policy stance may not be sufficient to extinguish selling pressure and calm nerves.

Another reason the FTSE 100 may struggle is its cyclical tilt, with the financials, materials, industrials, and consumer discretionary accounting for more than 50% of the index. That said, it is important to note that economically sensitive sectors tend to perform poorly when GDP starts to slow, as the weaker expansion undermines corporate profits. The UK economy is still seen growing at a healthy clip this year, but forecasts are being cut rapidly. For instance, the British Chamber of Commerce downgraded its projection for 2022 annual GDP to 3.6% from 4.2% a few months ago.

FSTE 100 TECHNICAL ANALYSIS

Earlier on Monday, the FTSE 100 briefly fell to confluence support near the 6,800 area, but was quickly repelled from those levels as some buyers resurfaced to bid price slightly higher. If the stock index builds on the recovery, the first resistance to consider appears at the 7,000 psychological level and then at 7,136, the 38.2% Fibonacci retracement of the 2022 decline. On the flip side, if bears retake decisive control of the market and manage to drive the FTSE 100 below the 6,800 floor, selling activity could intensify, paving the way for a move towards 6,625.

FTSE 100 TECHNICAL CHART

FTSE 100 Struggles as Soaring Oil Prices Spark Stagflation Fears, Key Support in Play

FTSE 100 chart prepared using TradingView

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---Written by Diego Colman, Contributor

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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