FTSE 100 Index V-shaped recovery faces crucial test

The FTSE 100 Index continued its uptrend this week as economic data released by the Office of National Statistics (ONS) pointed to a potential interest rate cut by the Bank of England (BoE). It rose to a high of £8,885 on Thursday, a few points below the year-to-date high of £8,900, and 16% above the lowest point in April.

BoE rate cut hopes boost the FTSE 100 Index

The Office of National Statistics (ONS) published relatively weak economic numbers, pushing analysts to predict that the Bank of England will cut interest rates soon. 

A report released on Thursday showed that the British economy grew by 0.9% in April, a drop from the expansion of 1.1% in the same period last year. It contracted by 0.3% on a month-on-month basis.

More data showed that the goods trade deficit rose by £23.21 billion in April from £19 billion in the previous month. The non-EU goods trade deficit widened to £8.6 billion.

Further, the UK industrial and manufacturing production weakened during the month. And on Tuesday, a report by the ONS showed that the labor market softened in April.

These numbers mean that the BoE will likely cut interest rates next week. This explains why UK Gilt yields plunged this week. The 10-year yield dropped to 4.474%, its lowest level since May 8, and lower than the YTD high of 4.817%.

Similarly, the five-year yield tumbled to 3.988%, down from 4.27% in May. Falling bond yields signal that investors anticipate that the central bank will slash interest rates in the future.

The stock market performs well when bond yields are falling because of the rotation to equities from the low-yielding bond market.

Top UK stocks of the week

Many FTSE 100 Index stocks were in the green this week. Fresnillo stock jumped by 12%, bringing the year-to-date gains to 127%. This surge happened as the silver price continued rising and hit its highest level in over a decade.

BP share price jumped by 11% as crude oil price surged and rumors of a takeover continued. The biggest news during the week was that Adnoc, a UAE energy giant, was considering buying some of the company’s assets. Analysts warn that a full takeover will be unlikely because of its size and complexities.

UK home builders like Persimmon, Taylor Wimpey, and Barratt Development surged by over 8% and were among the best-performers in the FTSE 100 Index. These stocks jumped as UK bond yields dropped, which may trigger more demand.

The other top gainers in the FTSE 100 Index were companies like Halma, Shell, British American Tobacco, BT Group, and Prudential.

On the other hand, the top laggards were companies like Anglo American, EasyJet, JD Sports, Diageo, and Babcock International.

FTSE 100 Index analysis: faces major test

The daily chart shows that the FTSE 100 Index has formed a V-shaped recovery as it jumped from a low of £7,543 on April 7 to a high of £8,885. It has jumped above all moving averages, while the MACD and the Relative Strength Index (RSI) have continued rising. 

This V-shaped recovery is now facing a major test as it nears its highest point on March 3. It needs to move above that level to invalidate the double-top pattern that has been forming. A break above that level will point to more gains to £9,000. The alternative scenario is where it pulls back and retests the 200-day moving average at £8,642.

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