It’s been a bleak Monday for the global stock markets as £130bn was wiped off the FTSE 100 in mere hours, marking the biggest falls since the 2008 financial crisis.
A combination of the threat of Coronavirus and the oil price crash led the index in London to fall almost 9% when trading began on Monday morning, sending global stock markets crashing. When trading began on Wall Street, the fall was so drastic that it triggered an automatic halt to trading.
In this article we look at the day’s events so far, how it might affect you and more about the FTSE 100.
Why have stock markets plunged?
There are two reasons why the stock markets have plunged; the Coronavirus and the collapse in oil prices. These two crises combined have panicked investors leading to sell-offs, leading to stock markets falling across the world, including by 8.7% in the UK, 7.3% in France and 7.2% in Germany. When the U.S stock markets opened they fell by 7% which triggered an automatic halt in trading for 15 minutes, implemented after the 2008 financial crisis and designed to prevent market meltdown.
Why has the Coronavirus affected the stock market?
Since the Coronavirus has taken hold stock market values have continuously decreased due to the fear that the outbreak will slow the global economy.
Factors including the restricting of movement and factory shutdowns have contributed to the panic.
We have already seen the impact of the virus on businesses, with domestic airline Flybe partly blaming the collapse in travel demand for its demise. Restaurants, hotels and retailers could also be affected by the virus as people are opting to stay indoors or away from large crowds of people.
China makes up a third of manufacturing globally and is the world’s largest exporter of goods, but factory shut downs have led to fears of supply chain problems.
How has oil price affected the stock market?
Another contributor to the fall in the global stock markets is related to the cost of oil. CNN report that oil prices have suffered their biggest fall since 1991 as it fell nearly 30% after Saudi Arabia said ti would step up production next month, flooding the market.
This decision was made over the weekend in response to Russia’s refusal to join an agreement with Saudi Arabia to limit supply. Their current agreement expires at the end of March. Over the weekend, Saudi Arabia decided to slash prices and produce over 10 million barrels of oil a day. This sent the price of Brent crude oil plunging in price overnight. Not only that, but it is expected that global oil demand will fall due to the Coronavirus, as factories are being shut down and transport becoming limited.
All of this combined will push prices down further, impacting countries that rely on oil exports for tax income as well as impacting FTSE 100 companies Royal Dutch Shell and BP, who saw their shares plummet this morning, and brought down the rest of the FTSE 100 with them.
What happens next?
Okay, so what happens now?
Ultimately, we have to wait and see. As containment policies are continuing to be implemented across the US and Europe, the economic slowdown from the Coronavirus doesn’t look like it will be picking up any time soon.
In terms of the oil price war, it is good news for consumers who may see lower energy bills but not so much for the oil giants, even more so if the Coronavirus impacts demand and continues to close down factories.
What is the FTSE 100?
The FTSE 100, known informally as “Footsie” is a share index of 100 companies listed on the London Stock Exchange with the highest market capitalisation. It is calculated in real time and is published every second when the market is open.
The FTSE 100 represents about 81% of the entire market capitalisation of the London Stock Exchange, and is the most widely used UK stock market indicator. You may also have heard of the FTSE 250 and the FTSE 350.
Companies trading on the FTSE 100 include BP, GlaxoSmithKline, Aviva, Coca-Cola and Sainsbury’s, to name but a few.
How are FTSE 100 companies measured?
The companies in the FTSE 100 are measured by their market capitalisation, which is essentially just their market value. The higher the market value, the higher they are on the FTSE 100.
To calculate the market capitalisation you multiply the company’s share price by the number of shares outstanding.
It is important to note that the larger the market capitalisation of a company, the bigger effect on the overall index. So the largest FTSE 100 company has a great impact on the overall index than the smallest.
Why is the FTSE 100 important?
You will often hear the FTSE 100 mentioned in the news when talking about the economy and global markets, but why is it important?
As the FTSE 100 is made up of both national and international companies, it’s often used to determine the health of the UK and international economy. It often adjusts to political and economic events around the world and gives an indication of company profits and investor optimism. The more optimistic investors are, the more the share prices go up.
It’s important to note that shares move up and down all the time, and as there are many international companies on the FTSE 100, it is not always the best way to measure the UK economy. Other indicators include the value of the pound, GDP and employment figures.
However, pension funds are often tied to stock indexes, and so it is likely that your pension investments will be invested in UK shares that are listed on the FTSE 100. This will also be the case if you have invested in a stocks and shares ISA, so the performance of the index can impact you directly.