FTSE 100 Index Drops Sharply as Trump Trade Diminishes
The UK Economy is Not Impervious to Economic Challenges
On Wednesday, 22 March 2017, massive selloffs took place on Wall Street. The Trump Trade effect – a phenomenon that has driven equities markets to record levels – appears to be fading somewhat. Investors and traders across the board are in two minds about Trump’s policies. On the one hand, his campaign rhetoric resonates with investors. However, the reality is that Trump Trade is being bogged down in the very Washington swamp that Trump is seeking to drain. As such, pessimism is replacing optimism on Wall Street, and UK markets are feeling the effects.
Trump has met with fierce opposition on every executive order, campaign promise, and appointment he has made. As head of 1 of 3 power branches of government, Trump is quickly learning that collaboration is required to get anything done in Washington DC. The Dow Jones Industrial Average, the NASDAQ composite index, and the S&P 500 index all racked up steep losses towards the end of the week. The Dow Jones is down 0.12% at 20,642.37, the S&P 500 index is down 0.06% at 2,342.56, and the NASDAQ Composite Index showed marginal gains of 0.24% at 5,807.59. Across the Atlantic, European stocks were reeling. The FTSE 100 index is down 53.62 points, -0.73%, at 7,324.72. What happens on Wall Street has a direct consequence on the FTSE 100 and other major European Bourses.
Where is UK Monetary Policy Going?
Owing to the rapid increase in UK inflation, there is now talk of the Bank of England raising interest rates in the near future. This will mark a sharp reversal from the current policy of monetary accommodation. All sectors on the FTSE 100 index have been feeling the pinch, with industrial groups, the banking sector, and basic materials all trading lower. Recall that the GBP/USD currency pair (The Cable) has been trading at record levels in recent weeks, owing to USD weakness. As the GBP strengthens, so the performance of the UK all-share index – the FTSE 100 – declines. The inverse relationship is well established, and is based on the fact that approximately 75% of companies on the FTSE 100 index generate offshore earnings. When these funds are repatriated back to the UK, they are worth more with a weaker GBP.
How Do Trump’s Tax Policies Play into UK Market Mechanics?
The UK markets are closely synchronised with the performance of the US markets. The domino effect is all too common with major bourses, and their subsidiaries. Issues like tax reform and deregulation of the corporate sector have been put on the backburner as Trumpcare takes centre stage. The health care plan is slated for a major debate in the House of Representatives on Thursday, 23 March 2017. Unfortunately for the banking and financial sector in the UK and the US, investors have taken a bearish perspective. That the Fed decided to hike interest rates on March 15, 2017 by 25-basis points helped bank stocks, but not much. The USD moved sharply lower after the Fed refused to push for additional rate hikes beyond the additional 2 slated for 2017. In London, European shares plunged to a 2-week low on Wednesday, racking up additional losses from the previous session. Bank stocks were down 1.8% across-the-board. Mining stocks have been particularly hard-hit with a drop of 1.7% across the board. Even copper dropped to a 2-week low.
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About Brett Chatz
Brett Chatz is a graduate of the University of South Africa, and holds a Bachelor of Commerce degree, with Economics and Strategic management as his major subjects. Nowadays Brett contributes from his vast expertise in online trading for iForexTrader.co.uk.