The FTSE 100 has been volatile this week. Even though the index has ultimately moved higher, it hasn’t been plain sailing. In my opinion, there were three main drivers for the index. These were the Bank of England meeting on Thursday, the negotiations between Ukraine and Russia and finally the move in the oil price.
Interest rate changes
As many expected, the Bank of England raised interest rates by 0.25% on Thursday. This wasn’t a huge shock, however the surprise came with some of the language that was used in the meeting. It centred around the fact that only a modest amount of further tightening of monetary policy might be needed this year. Raising interest rates is a form of tightening monetary policy. Therefore, the market took this to indicate that we might not see many more hikes in 2022.
The FTSE 100 initially dropped on the rate announcement, but rallied over the course of the afternoon. As I outlined in more detail here, higher interest rates are typically bad for most large corporations. So if more hikes look unlikely in 2022, this is a net positive, despite the increase of 0.25% this week.
I think that this will continue to be a driver for the FTSE 100 this month and beyond. Future meetings from the central bank will be watched closely by investors.
Negotiations making some progress
The situation in Eastern Europe was another key factor in what happened with the FTSE 100 this week. So far, the reaction of the market has been to fall as tensions ratchet higher, and to rally if positive headlines come out. This week, the negotiating parties of both nations seem to have made some progress. Hopefully this can progress further into next week, to ultimately bring about a peaceful resolution.
As for the FTSE 100, the index took the negotiations as a good thing. For the companies directly impacted by troubles in the region, peace would allow operations to resume. Even for those firms that don’t have exposure to the region, a more stable society would allow some investors to feel more comfortable investing again.
FTSE 100 driven by oil prices
Finally, the choppy oil price has influenced the FTSE 100. Brent Crude fell by almost $10 per bbl on Monday, but jumped back comfortably above the $100 per bbl level on Thursday. These movements pull the FTSE 100 with it to some extent, due to oil-related stocks.
Within the top 10 largest companies in the index are BP and Glencore. The success of both firms is tied up with how the oil price moves over time. So I can see why movements in the commodity price can feed through to the index itself.
These different drivers can overlap each other. For example, sanctions on Russian oil are reasons why the oil price is very volatile. As an investor, it’s important for me to understand the reasons for the day-to-day movements. It allows me to make more informed investment decisions.