FTSE 100 Under Pressure From Oil Ahead of CPI, Sainsbury's Earnings

As earnings season gets underway, the premier UK stock index consolidates amid geopolitical risks, with investors wary that British stocks will face greater headwinds amid high energy prices.

The Market-Moving Events

• FTSE 100 sliding as investors worry BOE will raise rates amid higher energy costs.
• UK headline CPI seen rising, but the core rate expected to stay steady, giving the BOE room to wait for more signs that price pressure is building.
• Sainsbury's earnings are expected to show modest bottom-line growth, but the focus will likely be on guidance after Tesco's shares dropped on disappointing sales projections.

UK Stocks Hesitant As Prices Rise

Several UK firms reported solid earnings on Monday, but they weren't enough to overcome market pessimism over escalating tensions in the Middle East. The theme could be repeated later in the week, when the UK's second-largest grocer reports earnings, after the market already priced in rival Tesco's results last week. Traders are worried that high energy prices will slow consumer demand and weigh on corporate profits.

At the same time, markets are also concerned that the BOE might be forced to raise rates to head off rising inflation. Last week, officials from Britain's central bank suggested that a rate hike is a definite possibility, with MPC member Megan Greene arguing against waiting for second-round effects before raising rates. Futures are pricing in between one and two rate hikes later this year. However, earlier in the week, Governor Andrew Bailey cautioned that the market might be getting ahead of itself in predicting rate hikes, as monetary policy tightening would hurt the economy.

Several data points are expected this week that could determine the path the BOE takes. First, the release of UK job numbers on Tuesday showed a surprise drop in the unemployment rate to 4.9%, down from 5.2%. Market focus now turns to CPI and retail sales later this week to get a better perspective on the monetary policy outlook.

UK Inflation Back to Rising

The ONS will publish the UK March CPI before the market opens on Wednesday, with the headline rate expected to accelerate to 3.3% from 3.0% in February. This is the first inflation data to capture the potential impact of the war in Iran, and the anticipated uptick is attributed to higher refined fuel prices. The core rate, excluding energy and food costs, is projected to remain unchanged at 3.2%. Abating some of the impact on prices is that energy bills in the UK so far haven't changed, but the fear is that if prices remain elevated long enough, utilities will rise, hurting the UK economic growth outlook. Further insight on that front is expected on Friday, with the release of UK March retail sales figures, which are expected to accelerate to 0.2% from -0.4% in February.

Sainsbury's Facing Pricing War

After Tesco's shares dropped last week as it warned sales could drop amid a pricing war, investors are looking at Sainsbury's full-year results with similar apprehension. According to the consensus of projections collected by the grocer, analysts expect earnings to see a modest growth to 22.1p from 20.9 a year ago,  The focus will likely be on the company's profitability, given the firm's success in maintaining market share by lowering prices. Traders will be looking to see whether Sainsbury's can increase its top line despite the price war, which could help support its share price. That would put the onus on the company's guidance for the next fiscal year, as investors hope the company will be more optimistic than rival Tesco. 

FTSE 100 in Sideways Consolidation

The UK 100 appears to be in a short-term consolidation defined by its Bollinger Bands, with the next resistance at 10730 and the next support at 10500. Depending on the inflation print, a break higher would open the door to the record high of 10950, while a breakdown would expose 10250.

Source: SpreadEx | UK 100, Daily Chart