On Friday, the FTSE 100 dropped almost 1% to close the week at 6,963 points. This is notable because ever since the market broke above 7,000 points back in the spring, there have only been two meaningful dips below this level. In order to keep the longer-term trend intact, the market ideally needs to recover swiftly. To help understand if that can happen, these are the reasons why the market has been jittery.
Inflation fears are back
The previous fall mentioned above was back in July. There were five days of downward movement in the FTSE 100, from around 7,100 points to just above 6,800. I wrote at the time about the main reasons that I saw for the crash. In short, rising inflation fears and rising Covid-19 concerns.
Rising inflation fears are back again. Last week, we heard that the year-on-year UK inflation figure was 3.2% for August, the largest jump since records began. Although some of this was due to the Eat Out To Help Out scheme from last summer that subsidised dining-out prices, it’s still a large figure.
The concern is that higher inflation will force the Bank of England to raise interest rates. This will increase the cost of borrowing for FTSE 100 companies. Given that the vast majority of companies in the index have debt, this is a negative for their share prices.
Falling iron ore prices
Another reason for the fall below 7,000 points was the index being dragged down by a few large firms. These were mainly commodity stocks including Anglo American, with a share price drop of 8% on the day. This was due to falling iron ore prices. With concerns over the future of China and lower demand, the large commodity stocks tumbled for much of last week.
The FTSE 100 has several large mining companies, including Rio Tinto and BHP Group. So when a negative issue impacts the whole industry, stocks in this area drag down the broader FTSE 100 index.
Keeping an eye on the FTSE 100
Finally, a third reason for the slump last week was more of a technical one. On Friday we had something known as ‘quadruple witching’. This refers to the day when financial derivatives, such as futures and options, all expire together. In short, the rare times during the year that this happens, the volume of stocks being bought and sold is huge. This invariably leads to large volatility as investors either buy or sell stocks to satisfy the ending requirements of their financial contracts.
On balance, the third reason isn’t one that overly concerns me. It’s the inflation story that I think could be the lingering issue and could cause more downward pressure on the FTSE 100. Clearly, I don’t have a crystal ball, but I think the next couple of weeks could be interesting to watch.
Any dips so far this year have led to enthusiastic share-buying, including the slump in July. Therefore, I’ll be watching out to see if the market bounces back above 7,000 points in the short run before taking any actions on my portfolio. As Corporal Jones famously said in Dad’s Army: “Don’t panic!”
