UK’s FTSE 100 falls to two-week low due to unexpected US credit rating cut.

UK's FTSE 100 falls to two-week low due to unexpected US credit rating cut.

FTSE 100 Falls as Fitch Downgrades US Credit Rating

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On August 2, the UK’s FTSE 100 experienced a significant drop of over 1% as global risk sentiment was shaken by the United States’ credit rating downgrade from ratings agency Fitch. This news was, however, accompanied by positive developments for BAE Systems, a defense company, which had raised its full-year guidance. Let’s take a closer look at these events and their impact on the markets.

Fitch’s Downgrade and the FTSE 100

Fitch’s decision to downgrade the United States’ credit rating from AAA to AA+ was prompted by concerns over the country’s fiscal situation in the next three years. The agency specifically highlighted the repeated down-to-the-wire negotiations over the debt ceiling, which have put the government’s ability to pay its bills at risk.

“The last-minute saves performed by Washington aren’t the kind of actions held in high esteem by rating agencies,” said Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown.

As a result of this downgrade, the FTSE 100 index experienced a 1.6% decline, reaching its lowest level since July 19. Similarly, the FTSE 250 midcap index also suffered a 1.2% drop. This decrease in global risk sentiment affected 22 out of 24 FTSE 350 stock indexes, with most trading lower.

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BAE Systems’ Positive Outlook

Amidst the general downturn, the aerospace and defense sector managed to buck the trend. The sector’s index gained 2.3% and reached a record high. Driving this performance was BAE Systems, the largest defense company in Britain, which saw its shares surge by 5.6%. This jump was a direct response to the company upgrading its guidance for 2023. BAE Systems now forecasts annual earnings per share growth of 10%-12%.

Market Movements and Individual Stocks

Despite the positive performance of the aerospace and defense sector, other industries were not as fortunate. Industrial metal miners, represented by the .FTNMX551020 index, experienced a slip of 2.5% due to falling prices of most base metals. Endeavour Mining also suffered a decline of 7.3% following its second-quarter results. The broader precious metal mining index, .FTNMX551030, slipped by 5.1%.

Looking ahead, investors are eagerly awaiting the decision of the Bank of England on monetary policy. The consensus leans toward a 25 basis point interest rate hike by the central bank.

Among individual stocks, Smurfit Kappa, Europe’s largest paper packaging producer, reported a fall in first-half core profit to 1.1 billion euros ($1.21 billion). Consequently, their London-listed shares fell by 1.5%. Conversely, ConvaTec Group, a technology firm, raised its full-year guidance, leading to a 2.8% rise in their stock price. Taylor Wimpey, the third-largest homebuilder in Britain, stated that it expects its annual UK home-build targets to be at the upper-end of its previous estimate. This announcement resulted in a 2.8% increase in Taylor Wimpey’s shares. Conversely, Haleon, the world’s largest standalone consumer healthcare firm, reported their first-half results, causing a decline of 2.2%.

Conclusion and Next Steps

The FTSE 100’s fall was largely driven by Fitch’s downgrade of the United States’ credit rating, which raised concerns about the country’s fiscal situation. However, the positive guidance upgrade from BAE Systems provided a ray of hope in an otherwise gloomy market. As investors await the Bank of England’s decision on monetary policy, the outcome will likely influence the future direction of the indices.

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