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Can dovish BOE restore FTSE 100 to 2022 peak?

The FTSE 100 is the only stock market in the Western developed world that has returned to the green on a year-to-date basis.

At the time of writing, this UK blue-chip stock index is adding to its year-to-date gains and is up 0.9% so far in 2022.

Can dovish BOE restore FTSE 100 to 2022 peak?

That’s in stark contrast to the year-to-date performances of these major stock indices:

  • S&P 500 (the benchmark index that measures the overall performance of US stocks) is still down by 12.8%
     
  • Euro Stoxx 50 (which measures European industry leaders) is down 12.7%
     
  • The MSCI World Index (which measures the overall performance of stock markets in the developed world) still has a negative performance of 14.7%


To be fair, stock markets have been rebounding since mid-June, even as central bankers worldwide continue raising their respective interest rates in their quest to quell sky-high inflation.

 

BOE widely expected to trigger 50-basis point hike today

Today, August 4th, markets are forecasting an 80% chance that the Bank of England (BOE) will hike its bank rate by another 50 basis points (bps) – which would be its largest hike since 1995!

Remember that the BOE began this rate hike cycle with a 15bps hike back in December, followed by a series of 25bps hikes, bringing its benchmark rate to 1.25% as of its June meeting.

Note how those hikes have been growing in size.

That’s because of the unrelenting inflationary pressures in the UK. The consumer price index (CPI) hit 9.4% last month – its highest print since February 1982.

But the worst is yet to come, with UK inflation expected to hit double-digits in Q4 later this year.

With all that in mind, hence the impetus for the BOE to trigger bigger rate hikes, and sooner. After all, many other major central banks have already proceeded with such larger-than-usual hikes already this year.

Note: Interest rate hikes are a central bank’s main tool in trying to rein in inflation.

 

However, it isn’t a straightforward task.

  • Rate hikes are intended to dampen demand and cool down economic growth.
     
  • The larger the rate hike, the greater the dampening effect on the economy.
     
  • Hike too quickly, and the economy could break, which is to say that rate hikes done too aggressively could inadvertently lead to a recession. Even from back in May, the BOE had already issued a dark warning about the risk of a recession next year for the UK economy.

 

With all that in mind, markets will be closely monitoring:

  1. the quantum of today’s hike by the BOE
     
  2. the BOE’s projections for how high its bank rate could go
     
  3. and also the UK economic outlook, in light of the incoming rate hikes (i.e. is a UK recession inevitable?)

 

Will fundamentals support FTSE 100’s positive technical outlook?

Note that risk assets, including equities, have been dropping through the first half of this year for fear of these looming rate hikes. Since then, stocks have been climbing on hopes that the “worst” of these rate hikes are over (or so markets think at present).

In other words, the FTSE 100 has been swept up in the belief that the BOE can’t send its bank rate much higher from current levels, for fear of triggering an economic contraction.

As things stand, assuming the BOE does proceed with a 50bps hike today, markets are forecasting only another 125bps in hikes remaining in this cycle. After that, market believe the BOE will have to reverse course and start lowering its bank rate by Q2 2023.

However, if the BOE today insists that the UK economy can indeed withstand interest rates moving substantially higher from current levels, all in the name of battling inflation that’s at multi-decade highs, that may prompt the unwinding of recent gains in the FTSE 100.

Such declines will be predicated on whether market participants actually believe that the BOE can actually make good on such threats of larger incoming hikes.

 

FTSE 100 within touching distance of 2022 high

The FTSE 100 is just 3% away from its highest closing price so far in 2022, registered on February 10th.

Having found support at its 200-day simple moving average (SMA) of late, UK stock bulls now have to conquer the 7440 region which has been a key battleground between bulls and bears since end-December. A sustained break above this resistance region may then bring the FTSE 100 back to within the upper trading range witnessed earlier this year between 7440 and 7650.

It’s still way too early to think that, over the near-term, the FTSE 100 can reclaim its record high, using intraday prices, at 7909.1 registered on May 22nd, 2018.

Let’s first get over the aftermath of today’s BOE meeting, and then take things from there.

 

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