The FTSE 100 wants to go down but the S&P 500 wants to go up, this is why the FTSE is going sideways. If the S&P does not go down, the FTSE will rally. The S&P is bullish, it is not clear why it is bullish because when trade tensions rise the index should decline. At the moment it is not responding to the trade war, perhaps investors are betting on a positive outcome.
A negative factor is China stock market, Chinese stocks are going down, I guess they are following all the other emerging markets.
Another negative factor is the rise in bond yields, the US 10-Year yield is above 3%, last time it was trading above that level the S&P corrected. But so far the S&P is not responding, the index is pushing near its all-time high.
When an index ignores bad news, it is really bad news. It is bullish short term but bearish long term unless the bad news goes away. Bond yields are set to rise significantly higher, that is the bad news. In the US I suspect rising inflation will push bond yields higher. This is bad for the stock market because when the spread between dividend yield and bond yields narrows, investors will sell stocks and buy bonds.
The dividend yield is falling because the S&P is rallying, bonds offer a better return relative to risk. Yields could also be rising because investors are losing confidence in the US government, the budget and current account deficits are enormous, in this situation investors will demand higher yields to compensate for the rising risk of default.
I believe the trade war will push countries like China to sell treasury bonds. China is the largest foreign holder of treasury bonds, they could retaliate to Trump’s tariffs by selling treasury bonds and not buying anymore. This would be a problem for the US administration, it would put pressure on bond yields and the US would have to find new buyers for their bonds, they need to sell bonds to fund the budget and current account deficits. Knowing that foreign countries are no longer buying bonds could panic investors and this would push bond yields sharply higher.
There is not much to add to the FTSE chart, the pattern is sideways, the price action is erratic. It could go either way. I still believe that it will go down to complete wave (v) but I could be wrong because the index is oversold on the 34-day BTI and the S&P is not helping in dragging the FTSE lower. And there is also a scenario where the S&P will rally. We need to wait until the odds favour one scenario or the other.