FTSE 100 falls but US stocks rise as markets weigh up Fed changes
The FTSE 100 dropped in afternoon trading but US stocks rose as investors digested the US Federal Reserve’s decision to take a more relaxed approach to inflation, a step that supported Wall Street stocks last night.
London’s main stock index fell 0.4 per cent to 5,977 points. The FTSE 250 of mid-sized firms climbed 0.1 per cent, however.
Read more: Fed to tolerate higher inflation in major policy shift
In the US, the S&P 500 rose 0.2 per cent. The tech-heavy Nasdaq climbed 0.6 per cent and the Dow gained 0.1 per cent. The dollar hit a new two-year low as the Japanese yen jumped.
Germany’s Dax slipped 0.5 per cent. Meanwhile, the Europe-wide Stoxx 600 also dropped 0.5 per cent.
The US Federal Reserve yesterday unveiled a new approach to inflation, under which it will tolerate periods when inflation runs above two per cent, so as to counterbalance those times when it runs below two per cent.
The Fed also announced a more relaxed approach to employment. It said it would be more tolerant of a booming jobs market, when it may once have feared it would drive up inflation.
Analysts said the shifts showed the Fed was planning to keep rates at close to record lows for the foreseeable future.
Investors were also taking in Japanese Prime Minister Shinzo Abe’s announcement that he will resign due to health concerns. Japan’s Nikkei 225 dropped 1.4 per cent after officials trailed the news overnight.
FTSE 100 a ‘serial underperformer’
The FTSE 100 was weighed down by advertising firm WPP, packaging company DS Smith and jet engine-maker Rolls Royce. They each shed more than two per cent as investors went off London stocks.
“The hangover from Powell’s speech yesterday has seen European markets give up initial gains,” said Chris Beauchamp, chief market analyst at trading platform IG.
He said the FTSE 100 continued to be a “serial underperformer”, struggling “desperately to hold 6,000, having closed below it yesterday”.
“Still, the Fed’s shift to a different policy offers the hope of a continued congenial outlook for equities in general, even if the policy is rather light on detail at present.”
The FTSE 100 is just days away from its quarterly reshuffle that is likely to see telly stalwart ITV booted out of the index. Analysts said bargain retailer B&M is likely to replace it, having benefited from a squeeze in incomes.
US stocks outstrip FTSE 100
The Fed’s steps, announced by chair Jay Powell at the virtual Jackson Hole economic policy symposium, broadly supported US stocks last night and that continued today.
“Powell’s speech was dovish enough to boost appetite in US stocks,” said Ipek Ozkardeskaya, senior analyst at Swissquote Bank.
However, the dollar slipped to its lowest price in almost two-and-a-half years, dropping 0.6 per cent on an index of other currencies.
The announcement that Japanese PM Shinzo Abe will resign due to health concers pushed up the yen dramatically, sending the dollar lower. The yen is considered a safe-haven at times of market stress.
Read more: UK records highest number of new coronavirus cases since June
The greenback’s fall helped the pound jump 0.8 per cent to climb above $1.33 for the first time in 2020. The pound’s climb has weighed on the FTSE 100.
“A bear steepening in the US bond market has done nothing to support the dollar which is set to end the week down against everything except the Argentine peso,” said Kit Juckes of Societe Generale.