FTSE Retreats from All-Time High – Weighs Gilt Selloff and Debt Expansion

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MARKETS TREND

The FTSE ended a 5-day winning streak yesterday closing in the red. US stocks propelled it higher earlier in session to a new ATH.

ftse retreats from new all time high

  • Debt expansion larger than expected in December
  • Gilt selloffs raise concerns
  • Reserve currency and safe haven status in doubt

The FTSE rallied this morning by 0.28% but remains below yesterday’s ATH as the stock market weighs expanding public debt and the US rally backed by Trump’s AI funding.

Expanding Debt Weigh on FTSE

The national debt increased by £17.8 billion in December compared to a forecast of £14.1 billion. The gilt markets have been declining across the board, with 10-year yields touching 4.295% before retreating lower.

The bond markets are weary of the national budget introduced in October last year. The effects of higher taxation but also higher spending may lead to increased borrowing needs.

Larger borrowing will necessarily lead to higher borrowing costs and may impact on the BoE’s capacity to cut interest rates. Most of the FTSE rally momentum has come from the perception the BoE will cut rates sooner rather than later.

FTSE Live Chart

FTSE

 

UK Safe Haven Status in Doubt

Investors have considered UK gilts and the pound as places to park their money in times of turmoil. However, the recent selloff in the GBP/USD and gilts has shown that these assets may no longer be places of refuge.

Scope Ratings suggests that the UK assets are becoming vulnerable to emerging market-style selloff. A sign that the country’s AA rating may not be as healthy as it used to be.

Government debt is now 100% of GDP, compared to around 45% of GDP before the 2008 financial crisis. The current debt to GDP ratio is clearly going to put pressure on borrowing costs.

At the same time, higher yields for government debt would attract investors to fixed income assets and away from the FTSE.

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ABOUT THE AUTHOR See More
Gino Bruno D'Alessio
Gino D’Alessio is a professional Forex trader with 20+ years of experience in the financial markets as a broker-dealer. Having worked in New York and London, Gino is regularly featured on Seeking Alpha. He completed the CAIA program in 2015, which also gave great insight into global macro factors. His main focus is FX majors, indices and commodities.
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