FTSE 100 support collapses

After four months trading sideways, North Korea and a sterling rally have conspired to dump the FTSE 100 below 7,200 for the first time since April.

Since Tuesday, the blue-chip index has lost more than 230 points, or 3%, initially the result of a stronger-than-expected inflation report then Thursday's more hawkish comment from the Bank of England's Monetary Policy Committee.

That appeared to bring forward the timing of a first increase in UK interest rates for over a decade. Rate-setters also agreed that withdrawal of monetary stimulus becomes more likely "in order to return inflation sustainably to target".

Earlier in the week, the Office for National Statistics told us inflation reached 2.9% in August, up from 2.6% the month before. That matches the May number, a level not exceeded since April 2012.

An increasing likelihood that UK rates will rise earlier than previous expectations - hot money was previously on late 2018 - fired sterling above $1.36 briefly. That's up over 6% in three weeks to its highest versus the dollar since the Brexit vote 15 months ago.

Against the euro, the pound is up 4% from €1.07 last month to almost €1.14 currently.

All this dramatically reduces the benefit felt by the FTSE 100's army of overseas earners, who between them make three-quarters of their money abroad. It also makes UK assets less of a bargain, so could impact overseas investment here.

It's understandable then that the FTSE 100 is down over 2.5% since Wednesday's close, and the more domestic-focused FTSE 250 is off a more modest 1.3%. The FTSE AIM All-Share is down a fraction less.

And on Friday, North Korea's latest missile test over Japan guaranteed the bears remained firmly in charge, and these moves are significant from a technical as well as fundamental perspective.

London's blue-chip index had traded largely between 7,300 and 7,450 for the past month. That lower figure had provided solid support on at least half-a-dozen occasions, so a break below is big news. It's also sunk below an uptrend stretching back to February 2016 and the 200-day moving average.

Around the 7,100 level is particularly significant level for technical analysts, it being the 23% Fibonacci retracement of the rally from February 2016 low to June 2017 high. It's also a previous peak reached in May 2015.

Analyst Alistair Strang said today that we're now in a region where "weakness toward 7,025 makes perfect sense".

Miners BHP Billiton and Rio Tinto are among the biggest losers over the past two sessions, both down over 5%. Supermarket Morrisons is down, too, following yesterday's weaker than expected second-quarter sales.

Housebuilders are also out of favour as a number of directors across the industry sell large stakes in their own firms. Taylor Wimpey, Barratt Developments and Persimmon are 3-4% lower.

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