Why Aren't The Ftse And The Pound Linked ?

[what]

Today i noticed this headline

http://news.bbc.co.uk/2/hi/business/8439186.stm

If the FTSE is rising why isn't the pound. If confidence is rising

then why won't this be shown in the strength of the pound ?

[tomandlu]

Today i noticed this headline

http://news.bbc.co.uk/2/hi/business/8439186.stm

If the FTSE is rising why isn't the pound. If confidence is rising

then why won't this be shown in the strength of the pound ?

I'm probably wrong, but I assume the FTSE is rising because of the weak pound (which helps exports).

[interestrateripoff]

Most of the top FTSE 100 companies are international so the FTSE doesn't reflect the UK economy.

Plus I think that they report profits in sterling so if your earning in a foreign currency and sterling is depreciating it's better for your shares / profit results.

I think that's how the logic works.

[Chicken]

they are linked (and one of the reasons why shares are viewed as a hedge against inflation). The improvement in manufacturing data is largely due to the weak pound.

Look at Zimbabwe - best performing local stock market in history during 2007, at the same time as the currency was devalued a billion-fold.

[Sour Mash]

Today i noticed this headline

http://news.bbc.co.uk/2/hi/business/8439186.stm

If the FTSE is rising why isn't the pound. If confidence is rising

then why won't this be shown in the strength of the pound ?

The FTSE is denominated in pounds. A weaker pound means a 'stronger' FTSE all other things being equal, simply because it takes more of the debased currency to buy an asset.

Trashing your currency is an easy way to hold up asset prices in nominal terms.

[Democorruptcy]

The FTSE and the £ used to rise together when they talked about investors favouring riskier assets. However since QE they have disconnected.

[the end is a bit nigher]

Why should they be linked? If they were then:

the ftse and other stock markets couldn't grow or shrink at the same time

there would be no organic growth without a subsequent change in imports and exports

base rates would have to change and hence the FTSE would be impacted one way or another

In reality, both Sterling and the FTSE can be influenced by the same things e.g. a strong economy will lead to an increase in profits and a higher FTSE, whilst also implying higher interest rates and a stronger pund. Or vice versa.

[leicestersq]

Today i noticed this headline

http://news.bbc.co.uk/2/hi/business/8439186.stm

If the FTSE is rising why isn't the pound. If confidence is rising

then why won't this be shown in the strength of the pound ?

I think you are on to something important here.

Many times in the past, countries have formally tied their currencies together at an agreed transaction price. It has never worked, unless those who did it were trying to create a disaster of some sort, in which case it was totally successful.

But as far as I know, no one has ever been insane enough to try and link the representative stock exchange index level, to a value of the currency. This really is a new idea, and is so crackpot, I am sure that it must be given its chance.

Isnt insanity trying the same thing over and over again hoping that you will get a different result? I say lets give insanity a chance, and link the FSTE to the value of the pound. That will show them.

[Peter Hun]

Why should they be linked?

Its quite simple, 60% of FTSE earnings are in foreign currency, due to exports and foreign earnings.

The pound goes down and the profits (and share price) of FTSE companies goes up in GBP.

[LiveAndLetBuy]

The FTSE is denominated in pounds. A weaker pound means a 'stronger' FTSE all other things being equal, simply because it takes more of the debased currency to buy an asset.

Trashing your currency is an easy way to hold up asset prices in nominal terms.

This is what I thought. Earlier on this year when both the FTSE and the pound had tanked, FTSE shares must have appeared eye-wateringly cheap to anyone holding euros (for example). So I thought that the FTSE rebound was largely due to "foreign investors" piling in. However that doesn't explain how market indices denominated in stronger currencies have also rebounded this year.

[buyerbeware]

I'm probably wrong, but I assume the FTSE is rising because of the weak pound (which helps exports).

Good and logical answer but wrong, it is all down to idle speculation.

[buyerbeware]

The FTSE is denominated in pounds. A weaker pound means a 'stronger' FTSE all other things being equal, simply because it takes more of the debased currency to buy an asset.

Trashing your currency is an easy way to hold up asset prices in nominal terms.

Good answer and in broad terms right the same as with property.

[Joey Buttafueco Jr]

Most of the top FTSE 100 companies are international so the FTSE doesn't reflect the UK economy.

Plus I think that they report profits in sterling so if your earning in a foreign currency and sterling is depreciating it's better for your shares / profit results.

I think that's how the logic works.

Indeed - a lot of the FTSE are dollar divi payers - in GBP a number of my holdings have had increased divis due to crashing pound.

[Guest_ringledman_*]

There is a flawed mentality shared by many of the uber-bears on here that the worse an economy does the worse the stock market will do. This being a reason to reject the stockmarket as a place to park your money.

Wrong.

Marc Faber believes that the worse the economies become the greater the rise in the stock markets as governments continue to print and QE.

As a currency weakens the stockmarket will rise (at least nominally) as investors park their money in a real asset. In real terms you may lose out but its a damn sight better than being in cash.

As previously mentioned the Zimbabwe market rose hugely (in nominal terms) as their currency tanked.

With 2/3 of the FTSE 100 earnings coming from abroad the weaker sterling becomes the greater the FTSE will rise.

Defensive funds are the place to be at the moment. Neil Woodford's IP Higher Income or Edinburgh Investment Trust as good as they get IMO. Nice 5% yield, the country's best manager and rock solid blue chip, cash rich, international companies.

Edited January 4, 2010 by ringledman

[broker1234]

I am a stockbroker and maybe I can answer your question.

The FTSE 100 is largely dominated by oil and mining shares and these are denominated in dollars. As the dollar weakens, the mining stocks and oil stocks will rise to reflect this change.

The pound has little to do with it even though most stocks on the ftse do bill in £££, indeed only a few such as AZN and JMAT actually bill in dollars. RDSA bills in euros as does ISAT but this has very little to do with their performance.

As the dollar has now hit a very low point, a 14 yr low against the Yen for example, it has been used instead of the yen as a carry trade currency, i.e investors have borrowed dollars on low interest rates to invest the money elsewhere in currencies yielding a better rate of interest (countres with higher interest rates). You will over the next 12 months see this carry trade unravel, as and when the yanks put up their rates. This will cause investors to rush to buy back the dollars they initially borrowed and the dollar will rise. This is likely to become an extremely serious problem and is what generally leads to hyper-inflation. The more people rush to buy them back, the faster the dollar will rise.

Couple that with the effects on the stockmarket. A rapidly rising dollar will cause mining shares particularly to plunge as the commodities become more expensive. China will rein back its buying, exacerbating the problem (it has a bubble all of its own just waiting to pop).

The pound would only be of importance if a lot of people traded commodities priced in ££'s or the UK was a big exporter which would make our goods more expensive to others. Well, commodities are priced in $$$ and we export very little, nor are we likely to start anytime soon if the government has any sense. Competing with a million indians on tuppence a day is just not feasible.

The Euro is weak due to problems in Greece, italy etc... and was always a stupid idea that will eventually fall apart. Greece now desperately need to devalue their currency for example, but cannot as they are now part of the 'Euro'. Nor can they print money like the UK as they are members of the 'Euro'. A single currency spanning so many countries was always an absolutely daft ideology in the first place but people will never listen until it all goes pete tong.

So you can expect a rising dollar, inflation in the US, crippling taxation in the UK, serious fall-outs in Europe and the pound will have very little to do with any of it...

Best place to put your money? Well that all depends if you are long, short or a combination of the two really. i doubt the bank is going to give you a great rate.

[Pick It Down]

There is a flawed mentality shared by many of the uber-bears on here that the worse an economy does the worse the stock market will do. This being a reason to reject the stockmarket as a place to park your money.

Wrong.

Marc Faber believes that the worse the economies become the greater the rise in the stock markets as governments continue to print and QE.

I agree with this. What would cause the stockmarkets to crash is an event that stops western governments from being able to print money in response to bad news. Once inflation is acknowledged by the central banks, I think we'll be back below 4000 again on the FTSE.

[libspero]

I agree with this. What would cause the stockmarkets to crash is an event that stops western governments from being able to print money in response to bad news. Once inflation is acknowledged by the central banks, I think we'll be back below 4000 again on the FTSE.

Today is a good example of inverse correlation..

GBP / USD = Down 0.38% currently

FTSE = Up 0.41%

[broker1234]

Today is a good example of inverse correlation..

GBP / USD = Down 0.38% currently

FTSE = Up 0.41%

If only it were quite that simple

Buy note out on the banks today, Barclays breaking trend, good economic data yesterday boosting sentiment...there are sectors that remain cheap and those that have rallied on the back of a falling dollar (rather than an increase in real demand).

I dare say the two will balance themselves out - i should think this year will be extremely dull to a casual observer in terms of points on the FTSE. Individual stocks will rally and fall within the FTSE sphere.

China will put a spanner in the works when their economic progress is exposed for the giant government sponsored spending spree rally that it is. The UK, however, should do rather well

[spivT]

I am a stockbroker and maybe I can answer your question.

The FTSE 100 is largely dominated by oil and mining shares and these are denominated in dollars. As the dollar weakens, the mining stocks and oil stocks will rise to reflect this change.

The pound has little to do with it even though most stocks on the ftse do bill in £££, indeed only a few such as AZN

and JMAT actually bill in dollars. RDSA bills in euros as does ISAT but this has very little to do with their performance.

As the dollar has now hit a very low point, a 14 yr low against the Yen for example, it has been used instead of the yen

as a carry trade currency, i.e investors have borrowed dollars on low interest rates to invest the money elsewhere in

currencies yielding a better rate of interest (countres with higher interest rates). You will over the next 12 months see

this carry trade unravel, as and when the yanks put up their rates. This will cause investors to rush to buy back the

dollars they initially borrowed and the dollar will rise. This is likely to become an extremely serious problem and is

what generally leads to hyper-inflation. The more people rush to buy them back, the faster the dollar will rise.

Hi. Welcome to the forum. I posted this bloomberg article line a few weeks ago, it seems to dismiss this idea of the new

dollar carry trade fuelling these impressive asset price rises . Your thoughts ?

http://www.bloomberg.com/apps/news?pid=20601039&sid=avARgMioihVQ

[broker1234]

Thats quite a deep thinking article to dissect, even for me.

I am a bit busy so have only read it briefly - it appears the thinking is a bit confused at first glance....

The collapsing dollar is a planned exercise, the renminbi is pegged to the dollar and it suits both parties for their exports to remain competitive during these troubled times. As Minutes from the Fed stated, things are 'proceeding in an orderly fashion'.

The dollar carry trade is an indirect consequence of the weak dollar, is was not part of a planned strategy by the Fed (I dont think so anyway). What money is selling dollars? Silly question really, various institutions, funds, high net clients etc... are all doing it. I dont really follow that point, maybe i need to read the article again. China also are selling dollars to keep their own currency competitive as they export in the main and are trying to avoid a collapse.

The weak dollar is causing the rise in commodity stocks, the dollar rally last month was triggered by much stronger payroll numbers in November than expected which led to speculation the fed would have to raise rates sooner than initially anticipated. The dollar rallied 5 and 8% against the euro and yen respectively in December. This rally is now petering out and the dollar is weakening against the euro and yen and you are seeing the stockmarket rise due to this and good figures.

The minimum reserves for banks are likely to be increased due to the recent credit crunch so it makes sense that banks are hoarding cash at the moment in anticipation of this likely event (a new act to make 'em hold more cash all the time).

But yes, it is a problem for tomorrow not today. Inflation is not a threat yet but one way or another, either directly or indirectly, printing money will cause inflation even if that inflation is imported. It may not happen next year but when the fed stops printing money and starts raising rates, you might want to consider an inflation linked bond. Maybe!

[Guest_ringledman_*]

Buy note out on the banks today, Barclays breaking trend, good economic data yesterday boosting sentiment...there are sectors that remain cheap and those that have rallied on the back of a falling dollar (rather than an increase in real demand).

A general good contrarian rule is to do the exact opposite of what city analysts say in 'buy' and 'sell' notes. These lot act in a herd mentality, protecting the profits of city institutions and not in the benefit of making individual retail investors rich.

A good book on the issue is 'Full of Bull' by S McClellan

http://www.amazon.co.uk/Full-Bull-Street-Money-Market/dp/013236011X/ref=sr_1_2?ie=UTF8&s=books&qid=1262705267&sr=8-2

'Do what wall street does, not what it says to make money in the markets'

Why Buffett bases himself in Omaha, away from the bull that the city spins out.

Edited January 5, 2010 by ringledman

[broker1234]

A general good contrarian rule is to do the exact opposite of what city analysts say in 'buy' and 'sell' notes. These lot act in a herd mentality, protecting the profits of city institutions and not in the benefit of making individual retail investors rich.

A good book on the issue is 'Full of Bull' by S McClellan

http://www.amazon.co.uk/Full-Bull-Street-Money-Market/dp/013236011X/ref=sr_1_2?ie=UTF8&s=books&qid=1262705267&sr=8-2

'Do what wall street does, not what it says to make money in the markets'

Why Buffett bases himself in Omaha, away from the bull that the city spins out.

Maybe you should do my job?

Or do your own analysis?

And quite deliberately i do not state what I am buying or selling. You want that information you have to pay for it my friend.

The only person who made money from that book was the chap who wrote it, not the mug that bought it. Perhaps you should telephone Deutsche bank and tell them your theory? As they have no declared interest in the stocks they are recommending, it would be an interesting chat.

[Guest_ringledman_*]

Maybe you should do my job?

Or do your own analysis?

And quite deliberately i do not state what I am buying or selling. You want that information you have to pay for it my friend.

The only person who made money from that book was the chap who wrote it, not the mug that bought it. Perhaps you should telephone Deutsche bank and tell them your theory? As they have no declared interest in the stocks they are recommending, it would be an interesting chat.

Firstly when I invest I use my own analysis and make my own judgement, not some mug trying to sell the same old stocks to all small scale investors.

Secondly when I am going to take advise it is from real investors independent of the city. Real contrarians who buy low and sell high in unloved sectors.The likes of Marc Faber & Peter Schiff. Not short term momentum plays that the city love so much.

The city loves these short term plays. Its all about churn. Buy and sell, bring in the transaction costs. Analysts dare not offend the companies that indirectly pay them. They also dare not be the black sheep and be contrarian to every other analyst out there.

Which broker or financial advisor ever promotes long term investment in real assets - 'ie Investment Trusts'? None as there is sod all to be earnt for them.

You read the book? The truth hurts. The city is there to create corporate profits from the casino capitalism and financial engineering that it creates.

[Joey Buttafueco Jr]

You want that information you have to pay for it my friend.

Why would someone pay for information? That would imply that it was possible to predict the equity market??

[broker1234]

Wow those 'real' investors outside the City must really have their fingers on the pulse of the action. Its amazing in this digital world of technology we need trading floors at all. Maybe we could all sit in our homes and chat online instead, i am sure we would pick up just the same information instead of convening in London at 7am everyday

This is going to come as a shock to you but some people can predict with accuracy what will happen in the stockmarket. Many tried and the majority of those who couldn't have now been fired. These amazing and mysterious people are called stockbrokers. The ones that got fired call themselves Home Traders. Maybe you should try contacting a decent broker and then instead of bitching all last year you could have enjoyed the best nine months in a generation.

Enough of this trivial banter. Go back to your banker bashing and general whingeing whilst the City will just plough on making money, propping up the entire economy whilst giving two fingers to fools like you.

The whole world is not conspiring against you. Remember that.