After a strong rally last week—driven by hopes of a ceasefire—investors are turning defensive following the collapse of peace talks between the U.S. and Iran. The subsequent confirmation of a naval blockade in the Strait of Hormuz has triggered a sharp rise in oil prices and renewed fears of supply chain disruptions. Last week rally pushed the FTSE 100 to 10688, at this level the rally has retraced nearly 80% of the previous decline. Given the rise in the oil price, and there is no reason to believe oil will go back to where it was before the war, the rally in the FTSE 100 is overdone. Everything will get more expensive, inflation will rise.
Investors don’t wait to see higher inflation before selling, they sell now. The only positive thing this week is the start of the earnings season. Q1 corporate earnings begin this week. Major banks are reporting soon, and investors are looking for fundamental strength to offset geopolitical jitters. We know that AI is making companies more profitable, the earnings reports should be positive. But the main concern is inflation, the rally last week is wave X of a double zigzag [W,X,Y], this rally probably ended at 10688.