The FTSE 100 index is down by more than 0.20% as the market continued to react to the negative headlines from the UK. The decline adds to the 8% decline that happened on Wednesday last week. Let us look at the three reasons why the FTSE 100 is under pressure.
US-China tensions
The FTSE 100 is falling as the tensions between the US and China rise. Over the weekend, Secretary of the State, Mike Pompeo said that the US had evidence that the coronavirus virus originated from a Wuhan lab. He did not provide any evidence. The statement came two days after Trump said that he had seen the evidence but was not allowed to disclose it. Obviously, China has rejected these claims.
The risk is that these claims could reopen old wounds on trade. In fact, Trump has hinted that more tariffs were on the table as he blamed China for the outbreak. In a recent interview, Jeffrey Gundlach warned that the coronavirus pandemic would lead to another wave of trade tensions between the US and China.
In fact, these trade tensions are the primary reasons why other indices like the Hang Seng, DAX, and Dow Jones are declining today.
More dividend cuts?
The market is also reacting to last week’s news from Royal Dutch Shell, which announced that it would suspend its dividend for the first time since the second world war. This was a big news for the FTSE 100, which is home to other large oil and gas companies like British Petroleum (BP), BG Group, Salamander, and Tullow Oil.
In an article published earlier last month, the Financial Times said that UK dividends worth more than £57 billion was at risk. The report said that dividends paid by UK companies would decline by more than 53% this year. Worse, the piece said that 40% of companies in the index had already slashed their payouts. This was before the bombshell by Shell, a supermajor. Other companies that have axed their dividends are banks like Lloyds and Barclays, and insurance firms like Aviva and Direct Line.
Brexit concerns
Brexit is another reason why the FTSE 100 is struggling. With time to June 31st running out, investors have started pricing-in the likelihood of a no-deal. According to the “divorce” agreement, the UK has until this date to ask for an extension.
Without an extension, it will be impossible for the two sides to reach an agreement because of the size of the deal being negotiated. The two sides have serious differences which are difficult to be hammered through video link and within less than a year.
In the meantime, the UK and the US will start negotiating their deal tomorrow. Even with this, some analysts expect key differences to emerge. For example, the UK has rejected any deal that would touch on the NHS.
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FTSE 100 technical outlook
On the daily chart, we see that the FTSE 100 index faced important resistance as it approached the 50% Fibonacci retracement at £6,219. The index then formed a bearish engulfing pattern and is now attempting to form a three black crows pattern. Also, the index has moved below the 50% retracement level. Therefore, I expect the bearish trend to continue as bears attempt to retest the 23.6% retracement level at £5,430.
On the other hand, a move above the 38.2% retracement of £5,871, will send a signal that there are buyers in the market. Such a move will invalidate the trend.
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