Tips On Trading The FTSE100
When looking at any equity index, it’s always helpful to know what the sector breakdown is, to better understand what type of economic environment the index is expected to perform in, and how.
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You understand the markets and trade with confidence. Learn more at our website here: https://financialsource.co
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We have a great question here from Morne who asks how would a push back from the BOE on negative interest rates affect the FTSE100? I think this is a fantastic question Morne and it allows us to go into a bit more detail regarding the FTSE100 which will be useful not only for this upcoming BOE meeting but also going forward as well.
When you are looking at any equity index, it’s always very helpful to know what the sector breakdown is for the to better understand in what type of economic environment the index is expected to perform better or worse.
So, when it comes to the FTSE100, we know that the sector composition is very heavily weighted towards value and cyclicals, things like Financials, Industrials, and Energy are all things that are expected to perform well during an early recovery phase, a pro-cyclical environment like the one the market consensus believe we are in right now.
Of these different sectors the Financials make up almost 20% of the index which is very important to understand. That tells us that anything that affects the financials is going to be very important for the index.
When it comes to financials, the one thing they tend to track closely is the bond market, more specifically the yield spread, and even more specifically the spread between 10-year Gilt yields and 2-year Gilt yields.
So, why is yields important for Financials, well it comes down to bank profitability. When rates are very low that eats into bank profitability, because it eats into the lending margins of banks. When rates go up that is good for the banks for the opposite reason.
So, a very good proxy for lending margins is a steeping yield curve, when long term rates or yields go up relative to short-term rates or yields. Thus, financials are a good buy early in a cycle when you have shorter-end rates pegged down and longer-end rates going up due to a better outlook and prospects for the economy.
Now, in our current context, the markets are anticipating steeper yield curves, because central banks are keeping short-term rates at the lower bound for at least the next couple of years, but the longer-end of the curve is picking up due to a better economic outlook.
So, when you look at something like the FTSE100 financials are always going to be a very important focus point due to it’s weighting, and because we know the yield curve is important for financials we know it’s also going to be important for the FTSE100.
For more detail - watch our video or visit https://financialsource.co/tips-on-trading-the-ftse100/
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If you find this content helpful, you’ll love Financial Source.
There’s a link below were you can learn more about it
https://financialsource.co
----
We interpret and explain price moves in real-time, 24 hours a day. Our team of analysts produce text, video and audio commentary.
You understand the markets and trade with confidence. Learn more at our website here: https://financialsource.co
-----
We have a great question here from Morne who asks how would a push back from the BOE on negative interest rates affect the FTSE100? I think this is a fantastic question Morne and it allows us to go into a bit more detail regarding the FTSE100 which will be useful not only for this upcoming BOE meeting but also going forward as well.
When you are looking at any equity index, it’s always very helpful to know what the sector breakdown is for the to better understand in what type of economic environment the index is expected to perform better or worse.
So, when it comes to the FTSE100, we know that the sector composition is very heavily weighted towards value and cyclicals, things like Financials, Industrials, and Energy are all things that are expected to perform well during an early recovery phase, a pro-cyclical environment like the one the market consensus believe we are in right now.
Of these different sectors the Financials make up almost 20% of the index which is very important to understand. That tells us that anything that affects the financials is going to be very important for the index.
When it comes to financials, the one thing they tend to track closely is the bond market, more specifically the yield spread, and even more specifically the spread between 10-year Gilt yields and 2-year Gilt yields.
So, why is yields important for Financials, well it comes down to bank profitability. When rates are very low that eats into bank profitability, because it eats into the lending margins of banks. When rates go up that is good for the banks for the opposite reason.
So, a very good proxy for lending margins is a steeping yield curve, when long term rates or yields go up relative to short-term rates or yields. Thus, financials are a good buy early in a cycle when you have shorter-end rates pegged down and longer-end rates going up due to a better outlook and prospects for the economy.
Now, in our current context, the markets are anticipating steeper yield curves, because central banks are keeping short-term rates at the lower bound for at least the next couple of years, but the longer-end of the curve is picking up due to a better economic outlook.
So, when you look at something like the FTSE100 financials are always going to be a very important focus point due to it’s weighting, and because we know the yield curve is important for financials we know it’s also going to be important for the FTSE100.
For more detail - watch our video or visit https://financialsource.co/tips-on-trading-the-ftse100/
-----
If you find this content helpful, you’ll love Financial Source.
There’s a link below were you can learn more about it
https://financialsource.co
