The FTSE100 Index is falling and there is no indication of a reversal away from present levels, reports Johnathan Smith of Spinks Analytics. “While we do believe that the FTSE100 will remain below target for the first half of 2021, we believe this is largely driven by doubts about the sustainability of the economic recovery, the likelihood of continued stimulus measures, and the global credit crunch. While the sharp drop in the FTSE100 Index was one of the biggest factors behind the weakening of world stock markets last year, the subsequent recovery has been far less forceful”.
This recession has affected every aspect of the global economy, including the stock market. One of the most significant economic forces driving stock prices right now is the spectre of higher interest rates and a faltering economy. The Bank of England has already indicated that it will be keeping interest rates on hold to fight inflation, but the signs are not good for the British pound. Consumer inflation is expected to pick up from current levels, but the over-all effect on business finances remains uncertain. There are signs that business may be feeling the squeeze with spending levels edging lower and profit margins for businesses tightening.
Jonathan Sheil of Pantheon Macroeconomics believes that whilst consumer inflation may pick up from current levels, it will not be enough to boost the FTSE100. “With unemployment rising and wage growth subdued, we think the Federal Reserve will have to look at ways of pumping more money into the economy via rate cuts”, he said. This could result in a weak recovery, prolonging the inflationary spiral which has plagued the UK economy over recent years. In addition, the slowdown in global economic growth will also have an impact on the stock market, further lowering its value.
Concerns have been growing over the past few months over the state of the economy, with business lending conditions have continued their deterioration over recent weeks. Despite official figures showing a strengthening in the health of the UK economy, chief executive of Santander bank Nick Robinson told the BBC, “It’s important to recognise that while the economy is recovering, there are risks”. Given the poor state of the credit industry over recent months, it seems the time to consider investing in the UK’s business sector is now.
Over the last few months, the FTSE100 index has lost ground against other leading stocks, largely due to worries over the direction of the Bank of England’s interest rate policy. The BoE’s decision to cut its base rate by half a percentage point to a historic low of 0.5 percent is thought to be one of the main reasons for the weakness of shares. These concerns have been compounded by the worsening picture across the US economy, which has seen stocks tumble by over three per cent in some areas. Uncertainty over the direction of the Federal Reserve will only add to the woes of businesses, exacerbating the decline in the FTSE100 index.
However, with this uncertainty came opportunities for investors who wanted to take advantage of the market dip and earn from their investment before it disappears even further. Traders and investors are once more jumping into the market as the BoE’s uncertainty has lifted, making trading even easier and more profitable. With less fear of the Bank of England keeping rates on hold, the FTSE100 is once again ripe for a quick recovery and is expected to bounce back strongly over the coming weeks and months. Even though trading is once again dampened by worries over the BoE, many traders have welcomed the chance to double up on their investment in shares and property. Businesses are particularly enthusiastic about this as a result of higher stamp duty rates hitting the pocket, which many business owners find extremely difficult to cover.