Plot thickens for FTSE 100 and FTSE 250 as UK gilts yield surge

The FTSE 100 and FTSE 250 indices suffered a harsh reversal after the strong UK inflation numbers pushed gilt yields higher. The mid-cap FTSE 250 index crashed by over 1.42% while the FTSE 100 dropped by 1.3. They have slipped by more than 4% from their highest point this year.

Gilt yields rebound

UK stocks crashed hard as traders reacted to the recent strong economic numbers from the country. Last week, data by the Office of National Statistics showed that the UK economy returned to growth in November.

Other private sector reports revealed that the housing market is doing well. In this, according to Rightmove, the asking prices of UK houses jumped in December. Nationwide and Halifax also revealed that UK house prices rose for three straight months.

On Wednesday, the ONS revealed that the UK inflation remained at an elevated level in December. The headline CPI jumped from 3.9% to 4.0%, double the Federal Reserve’s target. Core inflation also rose to 5.1%, signaling that the cost of living crisis is escalating. 

The implication of all this is that the Bank of England (BoE) will likely maintain interest rates higher for longer. Some analysts expect that the bank will even hike by 0.25% in it February 1st meeting. In a note, an analyst at JPMorgan said:

This view was confirmed in the bond market. The 5-year gilt yields soared to 3.89% while the 10-year jumped to 3.93%. In most cases, gilt yields tend to have a negative correlation on UK stocks because they usually imply high rates.

Most companies in the FTSE 250 and FTSE 100 indices were in the red. The top laggards in the FTSE 100 index were housebuilders like Persimmon, Barratt Developments, and Taylor Wimpey, which retreated by more than 3%. The other laggards were Prudential, Ocado, Glencore, and Land Securities.

On the other hand, the top laggards in the FTSE 250 index were Aston Martin Lagonda, OSB Group, Bakkavor Group, and Just Group. All these stock plunged by more than 4%. 

FTSE 100 index analysis

FTSE chart by TradingView

Turning to the daily chart, the FTSE 100 (UKX) index found a strong resistance at £7,750. It failed to move above this level since May last year. The stock has now crashed below the 50-day and 100-day Exponential Moving Averages (EMA). At the same time, the Relative Strength Index (RSI) is approaching the oversold level of 30.

The two lines of the MACD have drifted downwards while the histogram has moved below the neutral point. Therefore, the outlook for the index is bearish, with the next target being at £7,340, which is along the ascending trendline. This trendline connects the lowest point since August 18th.