It’s been a bad week for UK blue-chips with some substantial declines seen and the FTSE 100 on course for its largest weekly drop since August. Despite more murmurings of political instability and another piece of soft data this morning the pound has enjoyed another steady week of gains, rising against all of its G10 peers barring the euro which is pretty much flat compared to last Friday’s close.
Healthy pullback or the start of something more?
The warning signs for stock market bulls have been abound for a while now with the appreciation seen in sterling over the last month stopping the bulls in their tracks. The past few sessions have also seen a souring of risk appetite around the globe for equities with notable declines seen in New York, Frankfurt and Tokyo. There hasn’t really been any new negative developments to warrant the weakness, and for now it appears that this may simply be a healthy pullback after a strong run higher. However, with the FTSE now negative on the year and the German DAX handing back all of its year-to-date gains there is a worry that this could be something more.
Investors will be watching the coming weeks closely to see whether the market can stabilise and find some support as another week or two like this would really threaten to derail the long-running rally.
Rotation out of stocks to begin?
Rising bond yields could start to weigh on the relative attractiveness of equities and whilst the increase in returns available in the fixed income space have been remarkably slow and steady in their appearance, there could soon be a pivotal moment where the boiling frog syndrome manifests itself. Put another way, a gradual increase can see yields rise further without causing a noticeable shift compared to a rapid rise, which due to its more obvious nature would garner more attention. Given the extraordinary monetary easing measures introduced over the past decade money managers have been left searching desperately for yield in any asset class other than equities - often finding this pursuit fruitless. Interest rate hikes in the US, UK and Canada alongside a paring back of QE in the eurozone and Japan has seen a considerable move away from ultra-loose policy and boosted bond yields. We’re still some way from threatening the uptrend UK stocks that has been in place for around 18 months but with the FTSE currently almost 5% from its peak it is a notable pullback nonetheless.
BT shares hit 5-year low
It’s been a torrid time for shareholders in BT (LON:BT) over the last couple of years and those hoping for light at the end of the tunnel will be further disappointed today, with the stock dropping 5% to trade at its lowest level in 5 years after reporting its latest set of results. A 3% fall in revenue for the quarter ending 31 December is arguably the most worrying aspect of the latest trading update and despite an impressive increase in profit before tax of around 25% as well as some upbeat commentary from CEO Gavin Patterson the market is clearly unimpressed.