Why FTSE 100 has dived to five-week low
12th September 2016 13:21
by Lee Wild from interactive investor
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It had been a lovely end to the summer; glorious sunshine, record temperatures and a FTSE 100 at levels not seen for well over a year. But September can be a funny month, and with big swingers both in the City and on Wall Street back from vacation, markets are moving fast. Unfortunately, it's in the wrong direction.
After losing 80-odd points Friday, the FTSE 100 raced to a five-week low at 6,654 Monday due to a toxic combination of events. Most of it centres on economic stimulus and the promise of central bankers to "do whatever it takes" to prevent another financial crisis.
There was already huge disappointment at the European Central Bank's (ECB) decision last Thursday not to firm up an extension of its monetary stimulus programme past March next year. In fact, ECB president Mario Draghi said he and his colleagues hadn't even discussed the asset-purchase plan.
Federal Reserve rate plans are unsettling traders, too. Untypically hawkish comments from Boston Fed president Eric Rosengren frightened markets Friday, and it seems a September rate hike is back on the agenda.
Fed governor and uber-dove Lael Brainard gives the final speech from Fed officials before a week-long blackout ahead of this month's policy meeting. We won't hear what she has to say until after London closes, but her words will surely set the tone for Tuesday's session.
And, while Hilary Clinton's collapse at the weekend and subsequent diagnosis of pneumonia has no direct financial implications for markets, it reignites fears that Donald Trump could succeed Barack Obama as US president.
With odds of a US rate hike this month shortening, the dollar had a decent Friday and commodity stocks are pricing that in. Mining heavyweights like , and account for a sizeable chunk of the FTSE 100's 120-point dive.
Banks are unwinding gains made toward the end of last week. , and are all struggling Monday. There's also heavy profit-taking at recent risers , , and .
But there's big trouble at , the firm which owns the Primark cheap clothes chain. Despite a better-than-expected second half, it's warned that November's full-year results will reveal a year-end pension deficit of £200 million versus a small surplus last time.
That will mean a higher service cost and interest charge. If the pound remains weak against the dollar, margins at Primark will also be affected the new financial year. A stock trading on forward price/earnings (PE) multiples in the mid-20s cannot afford a scare at the best of times, let alone when investors are already questioning generous valuations.
"Equity markets have tumbled further, prolonging the falls experienced at the end of last week as investors weigh up market valuations against a backdrop of increasing uncertainty and risk," wrote Interactive Investor's head of investment, Rebecca O'Keeffe, earlier.
And the valuation angle is one which has been worrying many investors for some time. And it's a topic that's grabbed UBS's attention today.
Currently, the UK trades on a forward PE ratio of 15.9 times. Strip out the dotcom boom and it's the highest since records began in 1988.
UBS has revised its fair value for the FTSE 100 up from 12 times earnings to 13.9 times, the long run average PE ratio. "But even on these measures we struggle to get upside to the FTSE," it says. "To get noticeable upside from here we need either 30-40% [earnings per share] growth on average PEs, or continued multiple expansion."
Even after upgrading its 2016 year-end target for the FTSE 100, the new target of 6,500 implies further downside to current levels.
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