FTSE 100 drops sharply despite unprecedented support

Marius Paun | London, UK | Senior dealer | Tuesday, 24th March 2020

Mirroring the monetary and fiscal measures taken around the world, the authorities in the UK attempted to slow down the negative effects on the economy due to the coronavirus outbreak. First, in an emergency move Bank of England cut its benchmark interest rate by 50 basis points from 0.75% to 0.25%, also announcing a new $100 billion funding scheme to support small and medium-sized companies and new measures to stimulate commercial banks to lend more.

For the measures to have maximum impact the UK Chancellor Rishi Sunak also stepped in. During his first Budget, he promised a £30 billion stimulus spending package. But just like everywhere else the UK 100 continued to plunge as did the pound sterling.

The newly appointed Governor of Bank of England, Andrew Bailey took it to the next level, pledging unlimited loans to stop companies from going under. The UK central bank made it the second move regarding the interest rate by slashing another 15 basis points from 0.25% to 0.1%, a new record low. It also announced it will increase quantitative easing measures.

Not to be outdone, Rishi Sunak responded by promising a £350 billion aid package of loans combined with a string of other grants and business rates holidays. He said that represents roughly 15% of GDP (comparable with second world war effort) and ended in true Mario Draghi fashion, ‘we shall do whatever it takes to see the UK through the crisis’.

On Friday, the UK Prime Minister Boris Johnson told cafes, pubs, and restaurants to close. The finance minister Sunak made yet another pledge himself, the UK Government would pay 80% of wages for employees unable to work, up to £2,500 per month, describing it as ‘unprecedented’ in the country’s history.

Despite those really unprecedented fiscal and monetary measures, the FTSE 100 went into the weekend on its knees, falling further, even dipping below 5000 marks at some point. It’s probably because the confirmed coronavirus cases in the UK continued to spike. The authorities now fear the country could be now where Italy was two weeks ago and is well known that Italy has surpassed China in terms of casualties. As of yesterday, there were 6650 confirmed cases in Britain, jumping by 967 in the previous 24 hours alone according to the Department of Health.

So the UK Government felt it needed to tighten restrictions by going for the lockdown. On Monday evening Prime Minister Boris Johnson asked the public to stay at home, saying they will be allowed outside only to shop for necessities. Other restrictions were introduced which will be reassessed in three weeks. It followed criticism that some members of the public have not taken the advice very seriously so far.

On a side note the EU’s chief negotiator, Michel Barnier caught the coronavirus, so talks between the two sides have now been postponed. It’s unclear what the relationship between Britain and the EU will look like at the end of the transition period in December 2020 as decisions on a string of issues are clearly not a priority at the present time.

The long-term chart shows the FTSE 100 on a steady uptrend for 10 years until mid-2018 reaching a high of 7902 in May 2018. Since then it had retraced slightly, but by and large, moved sideways until two months ago. It’s obvious the coronavirus outbreak culminated with a steep selloff taking the price down to below 4800, a loss of 40% gives or take.

The price is now well below the trend line from May 2009. No doubt momentum is with the sellers as indicated also by the moving averages. Both are above the price, pointing downwards and the short term one below the longer-term one. The bulls could hope the drop was so sharp that a pullback might be in the cards at some point.

A rebound seems underway at the time of writing with a current level around 5300. If that rally runs out of steam, we can expect the bears to retest support at 4928 followed by the one at 4796. The recent low of 4776, last seen in August 2011 could also be retested. On the upside, the bulls need to confirm a break above 5396 first, which would open the door for testing the next resistance at 5535.