Wed, 22nd Jan 2014
The FTSE 100 stabilized down from 8-month highs on Wednesday, after strong jobs data gave rise to concerns over the possibility of interest rate hikes. Analysts also expressed concerns about weak earnings and overly-high valuations.
The unemployment rate has fallen to 7.1 percent in the three months leading up to November, lower than even the most optimistic of forecasts. The Bank of England has stated that if unemployment falls below seven percent then they may investigate the possibility of increasing interest rates.
Falling unemployment is good news for UK businesses, but in the short to medium term an increase in interest rates could cause problems for domestic companies because it would increase the cost of borrowing for both businesses and consumers, and will also drive investors away from equities.
Ibra Wane, a senior equity strategist from Amundi, told Reuters that they expected to see modest economic recovery, but that the Bank of England would be the first bank to tighten its policies. They explained that while the UK's economic situation is stronger than that of the Euro-Zone, the UK's equity market is not the market they favour for investing at the moment. The policies of the Euro Zone make their equities more appealing in the short term.
In spite of interest rate fears there are still some analysts that expect to see the FTSE 100 touch 6,850 before correction kicks in. However, concerns that many companies are trading above their valuation are holding back growth in the index.