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Factors that Impact the FTSE Index

Factors that Impact the FTSE Index

The Financial Times Stock Exchange or FTSE index comprises highly capitalised companies listed on the London Stock Exchange. One of the most popular FTSE indices is the FTSE 100, or “Footsie” as it is commonly called. The FTSE 100 is a share index of the top 100 companies trading on the London Stock Exchange by market cap.

Many international investors track the FTSE 100 to gauge the condition of the overall UK economy. But, most of the companies listed on FTSE 100 are internationally focussed, so the movement of the index isn’t always an accurate indicator of the UK markets. The FTSE 250, in comparison, is more focussed on UK companies. Nevertheless, the FTSE 100 is a highly traded index. Many factors impact its performance. Here are the 5 main factors.

1. The Bank of England’s Interest Rate Policy

An inverse relationship exists between interest rates and stock market performance. When the Bank of England (BoE) raises interest rates, investments in the FTSE 100 component shares tend to decline. This is because higher interest rates usually lead to decreased profits for companies, due to higher interest repayments. This negatively impacts the corporate earnings report.

So, the monetary policy decision of the BoE is closely watched by stock traders. In 2019, the British Central Bank joined other central banks around the world in slashing interest rates. Continued political uncertainty over Brexit and a slowing economy led to the BoR’s decision to keep interest rates low at 0.75% in September 2019. As a result, the FTSE 100 rose 0.58% on September 19, 2019. Overall, the FTSE 100 gained 12% in 2019, partly due to a dovish stance taken by major central banks across the world.

2. Corporate Earnings Reports or Announcements

Earnings expectations drive stock valuations. The degree to which consensus forecasts differ from the actual data release can impact volatility in the market. A surprisingly negative earnings report can have a dramatic impact on the share price of a company. Companies like HSBC, Royal Dutch Shell and Unilever PLC, which are assigned large weightages on the FTSE 100, can impact the index significantly with their individual stock performances.

For instance, on November 28, 2017, the FTSE inched 1.04% higher as Royal Dutch Shell announced plans to pay an all-cash dividend. The company’s shares rose 3.99%. In contrast, the FTSE 100 fell 1%, with lower-than-expected earnings being announced by Royal Dutch Shell and Lloyd’s Banking Group.

3. Oil Price Fluctuations

The FTSE 100 has some of the biggest companies in the oil industry, as well as some airline and automobile giants. These airline and automobile companies are negatively impacted by a rise in oil prices. An increase in oil prices leads to higher input costs for these companies. When consumers are compelled to spend more on gasoline, it can impact corporate earnings. On the other hand, companies like Royal Dutch Shell and British Petroleum have the capacity to offset the negative impact of higher crude oil prices.

In May 2018, as the US withdrew from the Iran nuclear deal, the threat of declining oil supply pushed crude oil price to $80/barrel. This drove the FTSE 100 close to record highs. The index rose 0.7% to 7787.97 points. So, FTSE traders should consider keeping a close eye on OPEC meetings and developments in major oil producing nations like those in the Middle East.

4. Pound Sterling Fluctuations

Over 70% of the revenues made by FTSE 100 companies comes from overseas earners. A rise in value of the Pound Sterling tends to reduce corporate earnings. This could lead to the index trading lower. However, whenever the US Dollar strengthens, the FTSE 100 inches higher, due to the same reason. A large portion of profits made by FTSE companies are in Dollar terms. When the Great British Pound (GBP) weakens, the converted revenue is worth more. Similarly, a weakening GBP against the EUR also drives the index’s performance, since a large percentage of the revenues comes from countries like France, Germany and Italy.

The Pound Sterling rose to $1.30 in early December 2019, due to rising optimism about a Conservative majority in the UK Parliament in the general elections held on December 12, 2019. As a result, the FTSE 100 dropped 1.61%.

5. Geo-Political Developments

The UK stock market is affected by political news and instabilities around the world, due to its huge exposure to the global economy. The Brexit saga has had far reaching consequences on the political, social and economic well-being of the UK. Investment activity has declined in the nation, due to related uncertainties, leading to an economic slowdown. On June 24, 2016, the FTSE fell more than 8%, after the Brexit referendum, its biggest decline since the collapse of Lehmann Brothers in 2008.

Since the index is impacted by the US economy, any developments on the US-China trade war front can also cause fluctuations. For instance, the FTSE rose 0.6% on November 25, 2019, after the Chinese state media made an announcement that the first phase of the US-China trade deal was close to being signed.

Apart from these five main factors that drive the UK FTSE, the Bank of England’s quarterly inflation report also impacts the index. The BoE’s inflation target is 2%. As long as this target is met, the Central Bank might have greater incentive to initiate rate hikes. As mentioned earlier, an interest rate hike tends to have a negative impact on the FTSE index.

Annual GDP growth reports also lead to market fluctuations, as foreign investors take it as a sign of sound economic health in the UK. On a final note, FTSE investors should also consider keeping an eye on bearish or bullish signals in specific industry sectors, such as financial services, consumer goods and automobiles.

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