UK Economic Data And The FTSE 100 Index

The FTSE 100 Index Rally Appears to Have Subsided, for Now…

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In a year that has been exceptionally volatile for the UK economy, the FTSE 100 index has bucked the trend. It started on Monday, 4 January at 6,093.4300, and hit a low of 5,536.9700 on Thursday, 11 February 2016. Since then the index consolidated in a tight trading range between 5,971.95 and 6,400 through early June 2016. The performance of the FTSE 100 index has baffled international investors and domestic investors alike, especially given the volatility created by the June 23, 2016, Brexit referendum. After the initial shock of the Brexit was felt, the FTSE 100 index bounced to record levels, maxing out at almost 7,000 on 15 August 2016.

Up until Wednesday, 7 September 2016, the 20-Day moving average and the 50-Day moving average figures were below the current level of the FTSE 100 index. Since then, a strong and growing divergence has been felt and the FTSE 100 index is now trading below these key levels. As at Wednesday, 14 September 2016, the 20-day moving averages 6812.2625 and the 50-day moving average is 6761.8888. The current level of the FTSE 100 index is 6721.98 – clearly lower than both critical averages. The importance of technical indicators like 20-day MAs and 50-day MAs cannot be understated. When traders are looking to place put or call options on indices, the trend is their friend. We are clearly in a bearish period for the premier UK index.

What Factors are Driving the FTSE 100 Index?

By all accounts, the UK economy is actually bullish at this time. We have seen a slew of economic data that appears to contradict what doomsday economists have been forecasting for months. Clearly, the Brexit decision has had a remarkable impact on the UK economy, notably the GBP. A weakening of the GBP from approximately 1.48 on June 23 to its current trading level of 1.32 against the greenback has changed the entire dynamic. Currency weakness propels export markets, and this is precisely why the FTSE 100 index managed to rally in recent months. Cheaper UK goods and services, more affordable UK vacations and increased GBP earnings from repatriated revenues all bode well for the FTSE 100 index.

Some economists have bandied the term – Brexit bounce – about as an indicator of the resilience of the UK economy. That Britain remains on firm ground, and not buried deep beneath the Atlantic is a testament to the quick-thinking of Bank of England governor Mark Carney and the monetary policy committee. Recall that there is confidence-building measures such as a 25-basis point bank rate cut to 0.25% and a massive quantitative easing programme have assisted tremendously. But here are some other trends that are notable for the UK economy, and also driving investor sentiment vis-a-vis the FTSE 100 index:

• The yield on 10-year UK government gilts has consistently declined since June 23. It recently began an upward march, at around the same time that the FTSE 100 index began declining.
• Growth forecasts for the United Kingdom have been revised sharply lower from well over 2% on June 20 13,016 to the following range (0.5% – 1%).
• The GBP/USD pair plunged from approximately 1.47/1.48 and consolidated in a tight trading range between 1.30 and 1.34.
• The manufacturing PMI data has bounced from below 50 (the contractionary level) to above 50 (the expansionary level).

Note that some of this economic data appears at odds with what the FTSE 100 index is doing, but a lot has to do with speculative sentiment. On Thursday, 15 September 2016, the Bank of England decided that it would hold rates at the current level but it would pursue additional rate cuts, if necessary in 2016. Strong retail sales during August have led the bank to forecast GDP growth for Q3 2016 of 0.2%. This could even be revised upwards to 0.3% according to bank officials. That the UK government has been hard at work purchasing government gilts is an important contributor to economic growth in the UK. Presently, UK consumer spending remains strong, but details of business investment will not be available for several months. Some of the problem areas in the UK economy remain commercial real estate and this is precisely why consumer spending is expected to perform better than business spending.

A caveat is in order: the UK has not safely steered out of turbulent Brexit waters and the performance of the currency and the FTSE 100 index are testament to that.