Where we are: The FTSE 100 is currently trading at 22288, down 108 points or -0.48% on the day, testing intraday lows. The index is underperforming its European peers and sits well off the session high of 22448. The current level is significantly below yesterday’s NY close, reflecting broader risk aversion and sterling strength.
What’s driving it: The primary driver is a further rise in UK gilt yields, with the 2-year up 6bp to 4.493% and the 10-year climbing 2bp to 5.017%. This is weighing on domestic sentiment, compounded by Lloyds’ acknowledgement of a potential £151m hit related to the Iran war and rising UK unemployment. The DXY is firmer at 98.61, adding pressure, while US yields are also climbing, with the US 2Y and 10Y up 3bp and 1.6bp respectively, further exacerbating the negative sentiment.
- The 2s10s curve steepened to +52bp in the UK, suggesting rate-hike expectations are being unwound to some extent, but the front end is still sensitive.
- Lloyds’ profit warning linked to the Iran war is a domestically specific headwind for UK financials.
- DCC’s potential takeover bid has injected some positive M&A sentiment, but it has failed to offset the broader macro headwinds.
NY session focus: All eyes are on how US equities react at the 09:30 ET open following the mixed performance of futures. Keep a close watch on the US 10-year yield; a break above 4.40% could trigger another leg lower in the Footsie. Focus on how the FTSE 100 reacts to S&P 500 movement. The trade that’s working right now is short UK financials and long USD. The pain trade here is a surprise dovish signal from the Bank of England which seems highly unlikely in light of the recent CPI prints.