Trading The FTSE 100 Index In September

On June 23, 2016, the fateful Brexit day saw the FTSE  100 ,326index trading at 6. In the run-up to the Brexit vote, the FTSE rallied from its June 16 figure of 5,958 as expectations of a remain vote grew stronger. Post-Brexit, there was a sharp drop in investor confidence and the FTSE 100 index plunged to a June 27 low of 5,996, followed by a sharp uptick to 6,575 by 1 July. Indeed, the resilience of the FTSE 100 index has been one of its most defining characteristics of late. In an era of global economic uncertainty, the FTSE 100 index has delivered a strong performance, with concomitant GBP weakness. We are currently experiencing a downtrend with the FTSE 100 index after it hit an August 15 high of 6,955.34. The current level of the FTSE 100 index is approximately 200 points lower, and this trend looks likely to continue.

Why Moving Averages Matter: Simple Moving Averages & Exponential Moving Averages with the FTSE 100 Index

ftsee 100 index chart

The 15-day simple moving average gives an indication of the performance of the FTSE 100 index over the past couple of weeks. For the most part, the FTSE 100 index has been ahead of the curve over the past 6 months. However, over the past 1 month, we have seen the 15-day simple moving average (SMA) rise sharply above the FTSE 100 index level. This change took place on August 23 when the 6,852 level was breached by the 15-day SMA. Since then, a strong divergence has been taking place. This is clearly evident on the above chart which indicates the start of the downturn for the FTSE 100 index on August 15 and the August 23 date of the divergence. The exponential moving average (EMA) line lies beneath the simple moving average line, and it moved higher than the FTSE 100 index on 31 August 2016. What this means for traders is that the trend with the FTSE 100 index is bearish, and it is breaking below the 15-day simple moving average and the 25-day exponential moving average lines.

Fundamental Factors Driving the FTSE 100 Index Lower

On 31 August, the FTSE 100 index took a knock. Wednesday’s wobble was instigated by a plunge in the price of commodity shares. This was due to oil futures paring gains and heading south. Commodity prices have long proven to be a source of concern for the FTSE 100 index. A recent slide in the price of crude oil has dragged the FTSE 100 index lower. According to the EIA (EIA), US crude oil inventories increased by much larger than anticipated. This had a negative effect on oil prices. UK energy stocks were also hit hard by lower oil prices, and Royal Dutch Shell, BP plc and BP all moved lower. Major mining companies in BHP (BHP) Billiton plc and BHP also ended in the red. Another reason for the recent slide in the UK premier index is dollar strength. Mining companies are negatively impacted by a resurgent US dollar, since dollar-denominated commodities such as gold, copper, silver, tungsten and others move closely with USD strength or weakness. As the USD appreciates, demand for dollar-denominated commodities moves in the opposite direction, ceteris paribus. The below chart indicates the recent rally in the DXY (US dollar index) and it is evident that a sharp appreciation has taken place.

ftse chart

Other Economic Factors Driving the FTSE 100 index

The UK premier index is driven by economic data releases such as construction PMI, industrial production (month on month and year on year) manufacturing production, retail sales, consumer sentiment, producer sentiment, balance of trade and core inflation. These economic indicators are released at regular intervals, and they are starting to show diminished sentiment post-Brexit. The upcoming economic data releases through September 10 include the following:

  • On Friday, 2 September 2016, the construction PMI data for August will be released with a consensus forecast of 46.1 and a previous figure of 45.9. Note that figures beneath 50 are contractionary by their very nature.
  • On Monday, 5 September 2016, Markit/CIPS UK services PMI data will be released with a previous figure of 47.4.
  • On Wednesday, 7 September 2016, manufacturing production for July (month on month) and industrial production for July (year on year and month on month) will be released.
  • On Friday, 9 September 2016, the balance of trade figure (£-5.1 billion) and construction output year on year (-2.2%) will be released.

The general trend with all of these economic data releases indicates suboptimal performance and declining numbers. This is another reason why investors are reluctant to drop anchor with UK-listed stocks, even if many of them are based outside of the UK. Consumers are also reluctant to spend on big-ticket items as they are awaiting further clarification post Brexit. Naturally, a reversal will take place as it is now relatively cheap to invest in the UK either as a business or a consumer, with interest-rate at 0.25% and quantitative easing at £435 billion. The GBP will likely continue to weaken which will help exporters and drive up economic activity in the UK. This invariably assists the FTSE 100 index. If we look at the recent trends with the GBP/USD pair however, it is clear that the sterling has been appreciating relative to the USD.


What is also interesting is that the upward pivot points for the sterling coincide with a decline in the FTSE 100 index. This makes sense, since the FTSE 100 index is comprised of’ 75% overseas-based UK operations. When the GBP appreciates, foreign earnings are worth less in the UK and this drags the index lower.

Disclosure: None. 

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