FTSE Under 7K - Is the Dam Breaking?

The FTSE 100 has held up better than other European indices exposed to the Russia-Ukraine conflict. Is the selling just getting started?


Talks are not going well

Going into the weekend, there was substantial concern over the situation in Ukraine. A deal struck on Thursday for opening humanitarian corridors fell apart, and there was renewed talk of a nuclear response. Traders were unwilling to hold risk assets through the weekend, which contributed to the FTSE 100 closing down 3.5% on Friday.

The UK's index was actually one of the ‘least worst’ performing that day, but it was still enough to push below the key psychological level of 7K. The UK benchmark also opened up lower in early trading on Monday, suggesting that there isn't much appetite for an immediate bounce.


What post-covid recovery?

The FTSE100 lost all of its gains year-to-date last week and is only up 3.4% over where it was 12 months ago. Last March was in the depths of the second covid wave. The index has wiped out all of the gains since the start of the covid recovery.

The underlying situation wasn't the most auspicious, with the BoE tightening rates to rein in inflation, compared to relatively lax policy across the channel. However, the situation might be improving for the UK index (at least, relative to those on the Continent), as the UK has more exposure to China. The largest stock by weight is HSBC. Furthermore, oil producers and miners are benefiting from higher prices, Big oil accounts for nearly 15% of the weighting on the index. This provides a substantial hedge from the pricing impact from higher crude that other indexes might not enjoy.

However, in the short term, risk avoidance is likely to keep investors out of the stock market.


FTSE to recapture 7k?

FTSE broke below both the 50 and 200-week moving averages last week. The latter seemed to be questionable at first, but the uncertainty cleared out this week as we see a decisive (so far) bearish move trading at 6800. The last time the 200-week average broke, the index plummeted 33% below its 200-week average, but that was due to covid.

Last week was a big blast lower for the UK's 100 index. The weekly bar engulfed nearly half a year's price action and continues to descend. At this rate, the next level of descent support lies at the June 8, '20 swing high near 6530. In the interim, 6700 is a high activity level. Inversely, the 200-week and 50-week averages form resistances at 6950 and 7165.

Source: TradingView

Key takeaways

Nuclear and oil sanctions rhetoric has increased and will be the leading indicator for all equity indices forward.

However, the UK is not as exposed to Russia's oil as Germany’s DAX and Italy’s FTSE MIB, so equity investors looking to redeploy capital when sentiment improves may prefer the FTSE 100.