Recently the FTSE100 Index has experienced a sharp drop, dropping by around eleven per cent on the day. Whilst this was an important development to watch, it is important to note that there are several economic indicators which could affect the performance of this measure, both locally and nationally. The key drivers of index movements are interest rates and consumer spending, but the economic crisis and the slowing of the Chinese economy have had a negative impact in the markets. In order to understand the causes behind this drop and how it may affect your business, you must take a closer look at how this index is calculated.
Purchasing Managed Funds is the core index components that make up this composite index. They represent a basket of assets, which are typically classified as being in the equity, wealth or health categories. This allows funds with differing risks to be included in the same basket. On a basic level, when a company issues shares on an unlimited basis, they are classed as a ‘Managed Fund’. When this occurs, the company issues new units on a regular basis, and the market price of the new units is the true market price of the shares.
Inflation is the underlying economic force that is driving the FTSE100 up, as higher prices will always result in investors cashing in their shares. In recent months there have been signs that inflation may be edging upward, with experts predicting that the BoE’s rate hike will continue to have a minimal effect on the FTSE100. Consequently, investors are now turning their attention to other factors that can affect the performance of the index. One of these factors is the Bank of England’s decision to tighten the base rate, increasing official rates across the UK. While the BoE has not confirmed whether it will raise rates before the end of the financial year, it has confirmed that its decision will bring about a strengthening in the pound and may lead to an increase in the FTSE100.
Other factors which could impact on the FTSE100 include the possibility of a vote of confidence in the European Central Bank, which could result in a move towards an easing of policy. The BoE’s increased interest rate is seen as a potential vote of confidence in the European Central Bank’s (ECB) attempt to stimulate the economy by keeping interest rates low, which is thought to be ineffective as the recession intensifies. Meanwhile, the US Consumer Price Index hit a three-month low, before rising slightly in May.
While most of the attention has been centered on the global and UK economic factors which are said to be having a major impact on the FTSE100, there are also some aspects of the trading system which could affect the overall performance of the market. This is especially relevant for those investors who use the futures market to hedge their exposure to the economic base rate or the central bank rate. If the prices of key commodities move against the trader, then they can lose money, but if the prices move in line with the economic index, then they can profit.
Traders are warned, however, that this means that they will have to bear at least some of the burden in case the market moves against them. It is not uncommon, for instance, for the FTSE100 index to move against the trader’s position during the onset of political and economic change. However, if the economic index begins to rise again once the new government is installed, then the FTSE100 will likely fall back in line with the new political trend. Similarly, traders should also be aware that there are times when the index’s direction is strongly influenced by external factors. For instance, if there is going to be an announcement of a major economic report, which is released within a day or so, then the price will likely move up or down depending on the reaction of the markets.