FTSE 100 outlook: is the forecasted rally over as index falls sharply?

Despite a strong rally on Monday when the FTSE 100 rose to a fortnightly high, passing 6264, the blue-chip index had fallen over 100 points by mid-afternoon on Tuesday.

Although analysts thought that Monday’s resurgence was a sign that the FTSE 100 index had broken free from its previous June price levels, the further upside that appeared likely failed to materialise on Tuesday when investor confidence slumped.

IG offers extended hours trading options for the FTSE 100 index and other major indices. Buy long or sell short on the FTSE 100 via CFDs and other instruments provided by IG's market-leading trading solution. Start today by opening an IG account.

What is causing the FTSE 100 slide?

Although the index remains bullish for the quarter, investors remain spooked by government inactivity and consumer confidence remains weak. As a result, many investors are waiting for further government stimulus before investing in the blue-chip index.

The index’s retreat was led by hotels and restaurants group Whitbread, which was down 4.3% following the release of the company’s trading update. In addition to this, investors were also informed that footfall in shops this weekend was much lower than many people anticipated following the loosening of lockdown restrictions. Earlier in the day, the British Retail Consortium (BRC) announced that footfall in shops was down 49.6% year-on-year last week. However, this figure is a slight improvement on the 53.4% fall which had been announced the week before.

FTSE 100 company JD Sports Fashion raised alarm bells in this regard. Although the company reported a ‘very strong’ online performance, it warned that footfall in stores will remain uncertain for the foreseeable future. They announced that this will remain the case while Covid-19 continues to impact customer behaviour and social distancing measures continue to have an effect on smaller retail stores.

Will we see share prices rise and the FTSE 100 rally return?

In spite of Tuesday’s retreat, analysts and investors alike are still bullish about the index’s performance for the upcoming quarter, which is good news for speculators trading futures (currently, 67% of our investors are going long on the market).

Tomorrow, Chancellor of the Exchequer Rishi Sunak is due to deliver his summer statement and outline his big spending announcements for the next six months. If further stimulus measures are announced and Mr Sunak is able to boost consumer demand, then investor confidence may return.

Similarly, many hope that housebuilders could give the FTSE 100 a lift. Following their trading update on Monday, Barratt Developments saw their share price rise by 3.1%, while fellow FTSE 100 companies Persimmon (1.2%) and Berkeley Group (0.4%) also saw their share prices rise.

For the FTSE 100, this is significant news. If housebuilders are once more able to build, then activity levels may bounce back strongly in the market and the FTSE may be forced higher. Early signs of such a trend are already apparent. In June, mortgage enquiries were up 100 per cent compared with May, and transaction volumes also rose sharply when compared with previous months. So, even with the FTSE 100 failing to make any ground today, housebuilding shares continued to offer some hope for the index and for investors who are speculating on the longer-term trends of the market.

Housebuilding is one area of the economy where Mr Sunak may also be able to provide a further boost. Although the industry is already rebounding, some experts have called for a suspension of stamp duty to further fuel investor demand.

Currently, there’s speculation that Mr Sunak may raise the stamp duty threshold or announce a ‘stamp duty holiday’ in his statement. Although many believe the changes will only be temporary (perhaps lasting for six months), this will end uncertainty and fuel market demand. It will also help the government meet Prime Minister Boris Johnson’s promise that Britain will ‘build, build, build’.