As we begin the last major trading week of the year, the FTSE 100 has got off to a terrible start. It currently trades at 7,105 points, down 165 points on the day. This equates to a 2.24% drop. Given that the index was trading easily above 7,300 points earlier in December, there have clearly been a few reasons for the sudden shift in direction. Here are a few of the issues that I can point to at the moment.

Potential for tighter restrictions

The major reason that I’m seeing for the FTSE 100 slump this morning is heightened fears over stricter Covid-19 restrictions. The spread of Omicron has been substantial, particularly over the past few days. The daily case numbers yesterday stood at just over 82,000, double what we had at the beginning of the month. 

Although there are some suggested work-from-home guidelines in place, it’s becoming more and more likely that we’ll have tighter restrictions in place soon. This negatively impacts the operations of companies within the FTSE 100. For example, those in the travel and tourism sector will have lower demand if people have to stay at home. In the retail sector, high case numbers could mean a struggle to get staff to work in shops.

At a broader level, restrictions have in the past been damaging to economic growth in the UK. This negative sentiment is clearly affecting the FTSE 100 this morning.

Oil prices falling

A second reason for the FTSE 100 moving lower is a fall in oil prices. WTI is down almost 5% today, trading at $67.50 per bbl. The FTSE 100 is home to several large oil companies. These include Royal Dutch Shell, Glencore and BP. It’s no surprise then that these companies are also heavily in the red this morning.

For example, Royal Dutch Shell shares are down almost 3%. According to volume data, it’s the most heavily traded share so far today in the index. 

Given that the FTSE 100 is a market-cap-weighted index, the large oil companies can disproportionally pull the overall number lower. So part of the drag as I write today is due to the oil companies struggling with prices coming lower.

FTSE 100 weighed down by rate hike

The final reason I’d note is more of a carry-through move from last week. On Thursday, the Bank of England decided to raise interest rates to 0.25%. This is negative for most stocks as it makes it more expensive for companies to issue and finance new debt. We did see the FTSE 100 fall somewhat on the announcement, but not by that much. 

However, now that the market has fully digested the report over the weekend, some of this move lower today could be linked to the rate hike. Given the concern around Omicron, investors could also be worried that the rate hike was the wrong decision.

Overall, the FTSE 100 is clearly struggling today. Yet short-term moves don’t always reflect the long-term direction. In fact, I can often use drops like this to buy some of my favourite shares at cheaper levels.

As I was expecting volatility, I’ve already prepared my watchlist of top stocks that I’d consider buying on a Covid-19-related dip like this. Here are two that I like right now.

The post 3 reasons why the FTSE 100 is down 165 points already today appeared first on The Motley Fool UK.

More reading

• Why did the Boohoo share price fall over 20% last week?
• 67% of investors regret their decisions: how to avoid impulsive investing
• 4 Warren Buffett tips I’ll be using in 2022
• FTSE 100 shares to buy today as markets plunge
• Can Royal Mail shares beat the market again in 2022?

Jon Smith and The Motley Fool UK have no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.