Interactive Investor

Chart of the week: when the FTSE 100 could drop below 6,000

7th March 2022 12:21

by John Burford from interactive investor

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Russia’s invasion of Ukraine is both a humanitarian and economic crisis. Coupled with inflation, this could escalate much further. Experienced analyst John Burford spells out just how low the FTSE 100 could go during this crisis.

Financial chart 600

FTSE is following my road map – hard down

When the Covid-19 pandemic suddenly hit the headlines, stocks slumped, with the FTSE 100 crashing from the January 2020 high of 7,700 to the March 2020 low of 4,800 – a severe decline of 35%. That was truly a shock to the system – and two years later, we are facing another but greater shock.

Since that 2020 low, shares had made a significant advance back to the January 2022 high. Many believed that with the pandemic (almost) history, the UK economy (and shares) were getting back to winning ways.

And then Russia invaded Ukraine – and the whole financial world has been turned upside down (again).

As I write, Brent crude has just hit $136 – only a tad below the 2010 all-time high at $147. Wow! Not only that but base metals are rocketing out of sight and agriculture prices – especially wheat – are trading at levels unimagined only a few weeks ago.

And note this: all the while, the dollar has been advancing very strongly. Since international commodities are priced in US dollars, commodities priced in forex have made even greater gains, with even more severe pain for less-developed nations. That spells trouble ahead for social stability.

In short, these developments have slammed into the stock market like a tonne of bricks. The Russian invasion is surely one Wall of Worry that stocks will be unable to surmount.

I have long held to my bearish stance on the FTSE and have provided a clear road map in charts I have been posting for weeks now. Here it is updated:

FTSE 100 chart John Burford March 2022

Past performance is not a guide to future performance.

Last week saw a strong decline to meet my pink 'Major support' and the uptrend line off the March corona crash low. This is my 'line in the sand' support.

Breaking this support will send it rapidly towards my lower pink target in the 5,500 region, with lower potential.

With credit stress expanding rapidly and commodity price inflation out of sight, can the banking sector survive this onslaught even with rising interest rates?

Here is Lloyds Banking Group (LSE:LLOY), which is a mostly domestic UK bank. Remember, if the financial sector weakens, that spells reduced economic growth ahead:

Lloyds chart (John Burford March 2022)

Past performance is not a guide to future performance.

The shares have risen off the September 2020 low at 23p to the January high of 55p and today are trading under 40p. With the Bank of England raising interest rates to 'combat inflation', dare they raise them further which would add considerable credit deflationary pressure to the economy?

With Lloyds shares weakening, investors believe the stress on consumer spending will increase and lead to the dreaded stagflation. Demand for loans will drop and the bubblicious housing market will be vulnerable to a drop in demand, with the spectre of repossessions looming once again.

And over in the oil majors, today's surge in crude oil has not produced a major leap in the shares. In fact, BP (LSE:BP.) is trading roughly where it was last Monday around the 350p region. That is not a bullish sign and may indicate oil prices have reached at least a temporary high.

Short term, UK shares are slightly oversold and due a bounce, but my longer-term outlook is bearish and rallies can be sold.

John Burford is a freelance contributor and not a direct employee of interactive investor.

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