The FTSE 100 is an index of 100 stocks of companies with the highest market capitalization listed on the London Stock Exchange. Because it represents the biggest companies in the country, the FTSE 100 index serves as a credible barometer of the United Kingdom’s economy. The index is calculated using the total market capitalization of the constituent companies. The FTSE 100 is usually very volatile because its value depends on the share prices of the numerous companies that make it up.
The FTSE 100 is very sensitive to economic and political news, both local and international, because some of the biggest multinationals of the world are listed on the London Stock Exchange. The index has largely been trending lower, with frequent upswings, since posting an all-time high of 7104 after the Budget was read in April, 2015.
The Current Drivers of FTSE 100
November, 2015 was a volatile month for the index as it posted sharp price swings in either direction. In mid-November, the FTSE 100 index posted the biggest single-day price jump after it advanced 122.38 points. This advancement was mainly fuelled by gains made by security stocks as France stepped up its military operations in response to the recent Paris terror attacks.
Towards the end of November, the index was weighed down by the slump in the Chinese stock market. The stock regulator in China continued investigating brokerage firms and this sparked a sell-off in the stock market. The news from China had ripple effects in the UK where mining stocks such as Anglo American, led the push lower. The discouraging news from China also drove oil prices lower because the Asian giant is one of the major importers of the commodity. This also caused an almost 1% drop in the share prices of BP and the Royal Dutch Shell, which continued to drag the index lower.
The recent ECB (European Central Bank) conference also did little to ease pressure off the index. The market had expected the ECB to announce a rate cut and more stimulus to the economy; a move that would have prompted the Bank of England to follow suit. This did not happen and pressure on the FTSE continued.
FTSE 100 Medium Term Outlook
The focus this month is on the December 16th U.S. Federal Reserve meeting on interest rates. It is expected that the Fed will hike interest rates for the first time in 7 years. While this will mostly affect currencies, there will be some impact on the equities market. A rate hike will strengthen the dollar (USD) against the sterling pound (GBP) and this will be favorable for exporters because their goods will be available cheaply in the global market. However, importers will suffer because products will now become more expensive. Based on this, the United Kingdom is a net exporter to the United States and the overall impact would be positive for the FTSE 100.
Some of the best individual performers of the index in recent years have been Vodafone and Hargreaves Lansdown. However, analysts suggest that these stocks could be headed lower based on their core fundamentals. This could have a negative impact on the FTSE 100. Vodafone shares are up 39% in 3 years but in recent months, its price has been mostly ranging. The stock is trading at ‘overbought’ levels while the company has seen its revenues fall two years in a row. It is highly likely that 2016 could finally be the year Vodafone shares dip.
As for Hargreaves Lansdown, its share price has mostly been driven by investor sentiment. The stock has risen over 50% during the last 12 months alone, placing the shares on a forward P/E of 38. Based on the industry the company operates in, that forward P/E should keep investors wary of any potential price retracements in this stock.
The ‘Santa Rally’
A ‘Santa Rally’ is when the FTSE 100 posts a positive return in the month of December. Historically, this rally has usually occurred in the last 2 weeks of December. Considered a stock market myth, the FTSE 100 ‘Santa Rally’ has occurred 26 times in the past 31 years and cannot simply be overlooked. The ‘Santa Rally’ usually occurs due to a numbers of reasons such as increased spending ahead of the festive season as well as portfolio repositioning by fund managers ahead of the new year.
As we approach the end of the year with the FTSE 100 trending slightly lower, traders can expect the downward pressure to ease a little bit as investor sentiment kicks in. According to analysts, the ‘Santa Rally’ is one of the most statistically visible trends in the stock market and traders could make their own ‘Santa Gift’ by looking for opportunities to go bullish on the FTSE 100 index. Additionally, the ‘Santa Rally’ can give investors an idea of how to trade the news during this festive season.
The FTSE 100 is a major index in the financial markets as its constituents are some of the most influential companies of the world. The index offers traders immense trading opportunities because of its constant volatility.