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06 February 2018

FTSE 100 turmoil after Wall Street and Asia slide

The FTSE 100 saw heavy losses at the start of Tuesday’s trading following sell-offs across US and Asian markets. The index hit a one-year low before going on to recover some ground during the morning’s trading.
 
James Andrews, Director – Head of Investment Management, said: “Perversely it was the jump in US wages shown in data released on Friday that, in addition to strong economic growth, has given rise to concerns that the Fed will have to raise interest rates faster than expected in the face of rising inflation fears. This saw bond yields rise and has been the catalyst for the sell-off in equities globally.
 
“An increase in bond yields and interest rates is potentially negative for equities on two fronts. Firstly, it increases the cost of companies’ debt, and secondly it gives investors another potentially less risky way of achieving a return on their cash.
 
“We have seen asset prices increase unilaterally in response to QE and the ultra-low global interest rates following the financial crisis, as cash had to move into riskier assets in order to achieve a return above inflation. It is the idea of this trade unwinding that has markets spooked.
 
“However, this feels like a fairly knee-jerk reaction to one data point and the Fed has already been raising rates with the intention of keeping inflation at the right level for steady economic growth. The fundamentals remain very strong both in the US and around the globe in terms of economic growth and company earnings. Therefore, it feels a little soon to be pricing in material changes to interest rates (other than those expected) and, consequently, returns for less risky assets.
 
“This isn’t to say the volatility can’t continue, as we have had a phase of very low volatility and some profit taking is natural following a prolonged period of exceptional returns. However, given the positive fundamentals around the globe currently, it feels like any market pull-back should be relatively short in nature at this time, until we see a material change in global interest rates, and therefore the return on cash and less risky assets, not to mention a less favourable outlook for companies globally.”
 
Please note, past performance and forecasts are not reliable indicators of future results or performance.
 
FTSE 100 turmoil after Wall Street and Asia slide
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