FTSE down as traders bail out on Fed exit fear

THE FTSE 100 fell through technical support levels yesterday on concerns that central banks could soon scale back the stimulus that has helped the equity market to approach all-time highs.

The FTSE 100 closed down 60.37 points, or 0.9 per cent at 6,340.08, near late-April lows of 6,280.

Sentiment turned bearish when the UK equity market broke below a rising trend line drawn from November’s 2012 lows. Prices held below the 20-week moving average near 6,430 and the daily RSI broke below a key rising trend line support.

“From a chartist point of view, there is no reason why the horizontal support threshold around 6,225 could not be reached in coming days or weeks,” said Nicolas Suiffet, technical analyst at Trading Central, warning a break below that level would open the way to 6,080 before a rebound could occur.

The trigger for sharp decline on the FTSE 100 – down more than seven per cent since mid-May – has been the cautious rhetoric from central banks as to how far they would continue to provide stimulus to support the economy.

The Bank of Japan’s decision overnight not to take fresh steps to calm bond markets did little to calm nervous investors.

That sparked fresh talk of when Federal Reserve might start trimming its $85bn a month U.S. asset purchase programme.

Traders sighted unsubstantiated rumours that the Federal Reserve could announce a scaling back of its programme after it meets next week.

But “I think the earliest it will happen is September (because) the economic data just does not support it,” Marcus Ashworth, part of the macro strategy team at Espirito Santo, said.

“The problem is the mere mentioning of tapering has sparked a fundamental realisation that investors in higher risk, higher yielding assets are in the wrong place now,” he said.

Adding to anxiety, the European Central Bank will be in Germany’s top court this week to defend the legality of its bond-buying programme.

All this follows decisions by the ECB and Bank of England last week not to extend their stimulus programmes.

The prospect of bond yields rising as central banks wind down asset purchases prompted insurers such as Prudential and Old Mutual, which offer higher yields and heavy exposure to bond markets, to shed up to four per cent.