The FTSE 100 closed Wednesday in positive territory, but it was anything but a smooth session.
The index closed at 10,688.47, up 30.34 points, or 0.28 percent, from 10,658.13 on Tuesday. It opened virtually flat at 10,658.22, gradually rising through the morning and early afternoon to an intra-day peak of 10,735.34.
It retreated from there as the market entered the closing hour in anticipation of the Federal Reserve’s interest-rate decision.
That pull-back suggested investors were growing wary as they awaited the Fed’s decision. The final rise was small but was enough to reflect that buyers were not entirely deterred from the market.
The FTSE 100 kept comfortably within its 52-week range of 9,177.09 to 10,989.45.
The waiting game ahead of the Fed
The biggest factor affecting global markets was the decision to raise interest rates by 25 basis points.
The U.S. target range was now 3.75 percent to 4 percent. It marked the first rise in the Fed’s easing cycle in three years, a decision seen as unanimous and largely anticipated, and helped to limit a possible reaction in London.
But investors read carefully between the lines as the Fed officials stressed that economic activity remained strong, thanks to “very productive and cap-intensive” economic activity and that the labour market was keeping pace “with the available workforce.”
At the same time, their inflation report said there was “too much” inflation for comfort and their forecasts implied another increase before the end of the year. The decision and forecast were published at the time as a 25-basis-point hike with another expected rise for the year.
This mixed message suggested the economy appeared to be strong, but the longer higher rates would be forced on the system could affect other markets.
For their part, British companies were always aware that decision-making in Washington could affect borrowing costs, bond yields, currencies and general investor sentiment.
Bond yields put pressure on some FTSE shares
The rise in bond yields was an important factor in influencing the wider market. The yield on the 10-year U.S. Treasury was at its highest since 2007 before the Fed’s decision, although it eased slightly after the announcement.
When government bond yields rise investors often reassess the value of shares, in particular companies that offer stability and regular dividends or income.
Such shares become vulnerable to a general downturn in investor sentiment and are associated with particular sectors such as:
- House-builders.
- Real-estate companies.
- Utilities.
- Other bond-proxy stocks.
High rates can reduce mortgage affordability, and hence damp house-building demand and put pressure on property companies’ revenues and funding, explains why such rate-sensitive areas of the FTSE 100 were struggling even though the broader index finished higher.
Banks, on the other hand, were benefiting from a higher-rate environment as long as borrowers remained solvent and did not fall victim to a general economic slowdown.
This meant the FTSE 100 contained a paradox — banks enjoyed prospects of sustained rates, but property and defensive income stocks were feeling the squeeze.
Oil held back some parts of the FTSE
Oil prices were also a major factor as energy companies accounted for a significant part of the FTSE 100.
Brent crude and West Texas Intermediate were both trading above $100 a barrel on Wednesday, although both fell from a recent peak. The rise followed a surge in concerns over supply disruption, including disruption of Saudi Arabia’s East-West pipeline and attacks on shipping routes in the Middle East.
Subsequent reports revealed that Saudi crude shipping was beginning to recover, which reassured some about the prospect of a prolonged shortage.
For the FTSE 100 this meant a mixed signal. Higher energy prices would help the major producers such as Shell and BP, and provide a boost against other indices without such strong energy exposure.
However, expensive oil adds to inflation, and could prompt central banks to stay tighter for longer. In effect, rising oil prices could benefit parts of the FTSE 100 but at the expense of the wider economy.
Shell and BP were both trading within a relatively tight range as investors balanced these factors. Traders were weighing the risk of further supply disruptions against reports that additional Saudi production would offset the disruption.
Technology fears began to subside
Global technology stocks also impacted the FTSE 100. Earlier in the week artificial-intelligence stocks faltered following the call by Anthropic chief executive Dario Amodei for a cautious approach to frontier AI development. Investors were left wondering whether the technology sector had passed its peak.
The news was countered on Wednesday by the reports that South Korea’s SK Hynix was contemplating a memory-chip partnership with Intel. This helped soothe nerves across the semiconductor supply chain and offered some support for industrial companies with an exposure to technology.
The incident underlines the extent to which markets are now linked. The reaction to a development involving two overseas chip companies could have a bearing on the confidence of investors in London, even if the firms were not on the FTSE 100.
Consumer data added another twist
The U.S. retail-sales data provided another reason for investors to wait before taking any further action. Sales increased by 1.2 percent in August, well above the 0.9 percent rise expected and a sharp turnaround from its revised 0.5 percent decline in July.
A resilient American consumer is to be welcomed by many, but if their spending power keeps growing, it will place further pressure on the Federal Reserve to raise interest rates and curb inflation. The threat to economic growth posed to the central bank will force policymakers to strike a delicate balance between supporting economic activity without fueling persistent price pressures.
This means that, for markets at least, better-than-expected economic data may not be so good for share prices if an increase in interest rates seems likely.
The FTSE’s strength, or lack of it
The FTSE 100 is not a pure indicator of how the British domestic economy is faring. Many firms account for a large part of their revenue overseas. Energy producers, miners, pharma, banks and consumer-goods groups can all accrue much of their income in a different currency.
As such many elements of the index acquire an international flavour. A falling pound means overseas revenues translated into sterling have more value when converted into the domestic currency. Meanwhile, the market can be more sensitive to global commodity prices rather than changes in national economic conditions.
The index is also skewed towards mature dividend payers. This can act as a safeguard in difficult times, but rising bond yields can diminish the appeal of regular income compared with government debt.
This suggests to some extent why the FTSE 100 was able to finish higher despite concerns over bond yields, oil prices and global technology stocks.
The next test for London shares
By the end of Wednesday investors had been given the Fed’s decision and the market still had a long way to go. Attention turned to how Wall Street would react on Thursday and how the Bank of Japan would react on Friday as the central bank looked set to raise its policy rate to 1.25 percent from 1 percent, its highest level in 31 years in a 7-2 vote.
The decision could have repercussions well beyond just the Japanese economy as it will have implications for the yen, bond yields and the migration of money between major financial markets.
Investors were also mindful of the situation in the Middle East. Any further disruption to shipping or oil infrastructure has the potential to send crude prices even higher and increase inflation expectations. However, renewed progress in Saudi exports offered some relief against the rising price of oil.
With the FTSE 100 comfortably within range of a positive move, despite being just 2.7 percent below its 52-week high of 10,989.45, its next move would be dictated by several elements.
A quiet rise with mixed messages
Wednesday’s 0.28 percent rise might seem small, but the pattern of the trading tells a more interesting story. The FTSE 100 rose steadily to 10,735.34 before reversing most of its gains to close at 10,688.47.
This suggests that, despite growing worries elsewhere, investors were still prepared to buy, but willing to reconsider in the knowledge of the risks gathering elsewhere.
Banks and energy producers offered some support as rising bond yields put pressure on property firms and rate-sensitive stocks. The drop in oil prices meant its benefits for energy stocks was being restricted and the strong economic data from the U.S. kept the possibility of higher rates on the agenda.
In effect the FTSE 100 was rising, but more cautiously.
The real question was not about the possibility of a 30 point rise in one day, but rather could the index rise if oil prices stayed high, rates were on the rise and central banks elsewhere became less forgiving?
Would the FTSE’s energy and banking heavyweights continue to act as a safeguard to the rest of the market—or would the higher costs of borrowing catch up with the whole index?
