Fixed Income  

FTSE drops after all-time high

FTSE drops after all-time high

Britain’s top share index has seen lows despite hitting a new all-time high on 24 February. A drop in utility stocks and a weakness in commodity-related shares pulled the stocks down in what may be the biggest drop since December 2014. But does it have much of an effect on the UK economy?

“The FTSE has been largely trading in line with and following the S&P 500 in recent weeks, with the recovery this week paced by the fall in bond yields in the eurozone, UK and USA, and on the back of the European Central Bank (ECB) starting its quantitative easing (QE) programme – aggressively given what has been bought by the ECB is some 50 per cent above what should be its target daily average,” said Marc Ostwald, an economist at ADM Investor Services.

With the upcoming general election, as well as the Bank of England looking to keep interest rates at 0.5 per cent, the UK economy is slowly coming back on track. According to the latest figures from the National Institute of Economic and Social Research (NIESR), the economy grew by 0.6 per cent in the quarter ending February. The pace of growth, according to the NIESR, was in line with the average rate of growth of the UK economy since June 2014.

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Meanwhile, oil prices have fallen almost 50 per cent since June 2014, pushing UK inflation down to 0.3 per cent in January. While some measures of inflation expectations in the UK have fallen throughout 2014, they still remain consistent with the target of 2 per cent, according to the Bank’s February inflation report.

“There are no market metrics which say anything about any economy in a QE world,” said Mr Ostwald. “The FTSE 100 has not really been a barometer for the UK economy for at least 15 years,” Mr Ostwald added.

However, there are signs of uncertainty in the market surrounding diverging central bank policy. With the ECB rolling out its $1tn QE programme and expectations building that the US Federal Reserve will start hiking interest rates soon, investors are being careful in taking the plunge.