As Sterling drops below $1.34 this morning ahead of the next round of Brexit talks with Brussels tomorrow, the FTSE 100 blue-chip index has hit a fresh record high, touching 7,843 points.
It’s the first time it has broken the 7,800 barrier, bolstered by the stronger US dollar and the US-China trade war being put on hold.
The truce between Washington and Beijing — though they haven’t reached a detailed agreement — is one of the big things fuelling the rise. Following tense negotiations, the two sides have reached an agreement that means tariffs will not be slapped on tens of billions of dollars of imports.
US Treasury secretary Steven Mnuchin — who flew to China at the beginning of May — announced the ceasefire last night. He told Fox News that Beijing had agreed to a framework to help reduce the US’s huge trade deficit with China.
The fall in the pound — which generally means international FTSE 100 companies that make their money in dollars benefit — takes it to its lowest in around five months. Investors are nervously awaiting economic data this week that could determine whether the Bank of England raises interest rates this year.
Inflation figures on Wednesday and gross domestic product on Friday will both be strong signals to the market of BoE governor Mark Carney’s intentions.
ING FX analyst Viraj Patel said:
Markets have lost faith and conviction over BoE policy tightening, we now place a strong emphasis on UK data to guide market policy expectations. Buckle up, it’s going to be a bumpy ride for the pound this week.
The FTSE could be poised to move sharply higher if the fall in the pound against the dollar continues. Analysts at CMC Markets and Commerzbank have both predicted the pound will move closer towards the $1.3300 level in the short term.
Neil Wilson, chief market analyst at Markets.com, said:
We must note that the FTSE’s gains of late are probably more attributable to a weaker pound as the dollar rallies across the board. Cable fell as low as $1.341, its weakest level since December as the dollar index jumped towards the 94 level.
If support at 1.34 goes, 1.33 comes into view pretty quickly. It’s this slide in sterling which seems to be buoying the FTSE as much as the broader risk-on sentiment.
Will Hobbs, head of investment strategy at Barclays, said:
There are some offsetting factors for the FTSE that help to relegate it down our pecking order of favourite equity indices.
The most important of these is that in a world where the cyclical prospects remain bright, outside of its commodities exposure, the FTSE leaves you with relatively less skin in the cyclical game than other stock markets.
Meanwhile, its banking sector lacks the recovery appeal of its more persistently troubled continental European peer group.
Mike van Dulken, Head of Research at Accendo Markets said:
Driving it higher are heavyweights, themselves benefiting from a recipe of positive drug news, refinancing, share buybacks, Asian exposure, high oil prices and a weak GBP.
According to Russ Mould, investment director at AJ Bell, there are four factors powering the FTSE 100 to record highs:
- The FTSE 100 under-performed its global stock market peers in total return, sterling terms in 2016 and 2017, something that will have not gone unnoticed by contrarian bulls.
- Unloved often means undervalued and the UK is not expensive relative to its international peers or its own history on an earnings basis, with the FTSE 100 trading on around 14 times consensus earnings estimates for 2018. In addition, there are a number of sectors – oils, retailers, real estate, house builders – which offer lowly valuations, attractive yields or both and therefore have the potential to surprise on the upside in 2018.
- The pound’s latest swoon is a further bonus – the FTSE 100 gets a good two-thirds of its earnings from overseas and the lower the currency goes, the more those profits are worth in sterling terms. The weak pound has the additional advantage of making British assets cheaper for overseas buyers and if sterling keeps sliding there has to be a chance for fresh bids to emerge for British firms – Sky, Smurfit Kappa and Shire are already all FTSE 100 firms that are subject to approaches from overseas firms.
- The FTSE 100 offers a dividend yield above 4%, according to an aggregate of consensus dividend forecasts for each individual constituent. This beats cash and the 1.49% yield offered by the benchmark 10-year Government bond, or Gilt, hands down. Such a yield could be a source of support for the index and chip in a healthy percentage of total returns from UK stocks in 2018. Granted, dividend cover is thinner than ideal, but the higher the oil price goes the safer the dividend yield from BP and Shell becomes and they represent nearly a fifth of total dividend payments between them