The Forces Behind FTSE Multi Year High

Despite the turmoil of strikes, high inflation, and struggling negotiations over Northern Ireland, the FTSE 100 has almost managed to break into new highs. What's up?

Recession Blues?

Most stock markets worldwide have been doing better, mostly recovering towards the latest highs recorded last summer. But the FTSE 100 had a difficult summer, making the highs of the prior year easier to beat.

Coming close to the record high has gotten many questions about what makes the UK's index unique.

Some point to financials performing better. Others attribute the performance to the latest inflation figures. The broad move in the index could be thanks to multiple factors. But when it comes to the discrepancy of the UK being officially in a recession but its benchmark stock index about to break a record high, one question comes to mind: how British is the FTSE 100?

How British is the FTSE?

The UK index includes a lot of international firms which are experiencing global conditions more than what's happening in Great Britain. These firms also are among the highest weight on the index, meaning they have a bigger impact on its directionality. The biggest company on the FTSE 100 is Shell, which has seen substantial growth thanks to high fuel prices lately.

AstraZeneca is the second largest component, which is benefitting from increased sales. Unilever is the third largest, which has seen growing sales worldwide. All told, the top 10 largest firms constitute around half of the weighting, and they are firms experiencing growth outside of the UK, such as HSBC, BP and British American Tobacco.

Does this mean the trend will continue? According to the World Bank, the global economy is expected to be slower in the first half of this year. This could crimp growth among these global companies, regardless of what happens in the UK. On the other hand, many of them - BP, Shell, HSBC - have considerable exposure to China through direct business activities or selling a commodity expected to appreciate as Chinese demand for energy ramps up. A closer look at China might give more directionality for the FTSE 100 in the coming months than the latest events in Great Britain.

FTSE stops on double-top formation

The UK's index recently breached the upper flag near 7400 and headed towards record highs. Bulls failed to reach the peak of 7900 for a few points alone, and prices have pulled back in the short term. However, if bulls defend last February's swing at 7770, the FTSE could still see higher levels.

The 8k handle is the next natural resistance, being a round level, with the flag's measured move (7770-6700 leg, added on breakout of 7400), bringing the 8400 into the spotlight above there. But for now, we consider a double-top formation complete until proven otherwise.

Key takeaways

Worldwide stock markets have been merely recovering while the UK's index is near record high despite being in recession. The FTSE is heavily influenced by international firms which constitute around half of the weighting and are experiencing growth outside of the UK's economy. These firms have a large exposure to China, which could potentially have a big impact on the directionality of the index in the coming months. However, a slower global economy predicted for the first half of the year could negatively impact these firms growth.