FTSE drops on recession fears; homebuilders slump

London’s stock market continues its downward trajectory this week, with a particular decline seen in the homebuilding sector. Investors are grappling with the potential risks of an impending recession and its potential impact on corporate earnings.

Early trading on Friday saw the benchmark FTSE 100 index down by 0.3%, while the FTSE 250 index experienced a 0.4% loss. Both indexes are currently on track for their most significant weekly drop since the banking turmoil witnessed in the United States back in March. These declines have been fueled by concerns that global policy tightening may persist for an extended period.

The Bank of England’s decision to implement a rate hike of 50 basis points on Thursday, prompted by fears of inflation, has only amplified concerns about the possibility of a recession. As a result, investors have increased their bets on interest rates peaking at 6.1% in February, further fueling speculation of an impending economic downturn.

Jefferies analysts noted, “BoE’s 50-bps hike increases odds of a recession and inflation moving lower.” They also highlighted the potential shift of flows from equities to fixed income during the month- and quarter-end rebalancing, which could exert pressure on the stock market in the coming days.

Adding to the prevailing sentiment of uncertainty is the recent hawkish stance adopted by the U.S. Federal Reserve, along with rate hikes implemented by major central banks on Thursday.

However, there are some positive indicators within the UK economy. Data revealed that retail sales in May unexpectedly rose, suggesting that the majority of consumers are managing to cope with the impact of persistent inflation on their spending power.

Stuart Cole, Chief Macro Economist at Equiti Capital, stated, “Despite the hikes so far, aggregate demand is still holding up, and with wages continuing to grow strongly, the solution may increasingly involve the corporate sector taking a hit until it is compelled to reduce its workforce.”

Additionally, another set of data indicated that the services sector has shown signs of slowing down this month.

The declining homebuilding sector, which is sensitive to interest rate fluctuations, experienced a slump of 2.2%. Conversely, healthcare stocks saw an upward tick following a 5.5% increase after GSK (LSE: GSK) reached a litigation settlement in the United States regarding its heartburn medication, Zantac.

Shares in Ocado (LSE: OCDO) retraced 8% following a surge on Thursday that was driven by speculations of a potential bid.

The global podcast company, Audioboom Group (LSE: BOOM), witnessed a significant decline of 25% as its forecasts fell short of expectations.