The FTSE 100 index is having a tough time as we head towards the end of the week. It broke below 7,000 points, down over 2% on the day. Although a move of 2% in an individual stock isn’t large news, the fact that the index as a whole is down this much is big news. In particular, mining and banking stocks are taking the most heat in the FTSE 100 crash today. So what’s going on?
Falling bond yields
Banking stocks are weighing the index down. These include Barclays and NatWest, both of which are down 3%-4%. The issue here is that bond yields are falling. The benchmark 10-year Gilt is down 5% today. This is a measure of the forecasted interest rate in a decade. So falling yields are a bearish expectation that the UK economy might not perform well in the future.
This impacts FTSE 100 banking stocks as lower interest rates are bad for business. One of the key ways a bank makes money is in the different rates between the money lent out and the interest paid on savings held. The higher the interest rate, the larger the margin the bank earns in-between. With rates very low, it’s hard to make money, as, in theory, the bank can’t charge you for cash you hold (a negative interest rate).
So the move lower today in the bond market is negative for banking stocks and the FTSE 100 overall. Given the fact that the index has several large banks and financial services firms, it pulls the overall index down with it.
Falling commodity prices
Mining stocks have also been hit hard today, contributing to the FTSE 100 crash. Anglo American shares are down 5%, with Glencore and Antofagasta also down over 4%. These are some of the worst performers today in the whole index.
This is tied in with a fall in some metal prices. Copper, palladium, iron ore, and zinc are all falling in price today. It’s unusual to see almost all metals in the red at the same time, so it’s clear that investors are not positive on commodities right now.
FTSE 100 mining stocks are negatively impacted here because the metals produced are worth less than before. Depending on the exposure to different metals, some companies are very correlated to the price of a particular metal.
Not panicking with the FTSE 100 crash
There are clearly good reasons for the crash in the FTSE 100 index so far today. Yet, it doesn’t materially concern me as a long-term investor. The move lower in the bond market is concerning, but the Bank of England is forecasting inflation to rise. Therefore, this should support higher interest rates, not lower.
With regards to commodity prices, they have always been volatile and will continue to be. If the price of certain metals bounces tomorrow, then I’d expect the mining stocks to flip to being the best performers.
So although it’s good to keep an eye on the markets everyday, I am not concerned about short-term moves.
