What is driving the FTSE 100 surge?
The FTSE 100 has hit a new all-time high today, with the index within touching distance of 8,500 for the first time.
Since the start of the week, London’s main index has grown almost three per cent, outperforming the Nasdaq, the S&P 500, and the Dow Jones.
The strong performance from the FTSE 100 came “despite all the doom and gloom around Budget-related cost pressures on businesses and a sell-off in the government bond market,” noted Dan Coatsworth, investment analyst at AJ Bell.
Yields on UK government bonds, known as gilts, have come down significantly from decade-long highs reached earlier this week.
UK 10-year gilt yields have fallen to 4.65 per cent, down from the highs of 4.9 per cent they reached on Tuesday. However, they are still slightly higher than where they began the new year.
The decline has been partially prompted by declining US government bond yields after soft inflation data from the US. If fears around inflation continue to subside across the Atlantic, it will likely have positive affects for gilts too.
Meanwhile, weak growth numbers for the economy, along with poor numbers for industrial production and retail sales have left the market more optimistic that the Bank of England will cut interest rates in its February meeting, giving the FTSE 100 a boost.
A key driver of increased bets on rate cuts was Tuesday’s inflation data for December which came in below expectations at just 2.5 per cent.
“Given how fears of stagflation are very high, if the weaker GDP, industrial production, and retail sales figures had preceded the CPI report, the reaction in UK assets could have been significantly more negative if investors were still unsure about how inflation had evolved,” said Daniela Sabin Hathorn, senior market analyst at Capital.com.
The market is now predicting a 91 per cent chance of a rate cut from the Bank of England next month, compared to just 73 per cent at the start of the week.
Interest rate futures markets are also pricing in nearly three rate cuts in 2025, up from less than two at the start of the week, as traders begin to match the Bank’s expectation of four cuts throughout the year.
Further economic data is also expected out next week, including labour market and public sector finance data from the Office for National Statistics, which could either help or hurt market perceptions of further rate cuts.
Meanwhile, FTSE 100 members like Primark-owner Associated British Foods, as well as key FTSE 250 constituents like JD Wetherspoon, Premier Foods and Quilter, all have trading statements for last quarter due out next week.
Looking to the FTSE 100 members today, and which all sectors have performed well, the rally leaders has been the materials sector, with oil companies and miner Glencore charging ahead.
“M&A news is spurring interest in the FTSE 100 at the end of this week, as Rio Tinto and Glencore were reported to be exploring a merger at the end of 2024,” Kathleen Brooks, research director at XTB said.
A nine per cent rise in the price of crude oil since the start of the year, along with booms in other commodities, has pushed the energy to the top performing section of the market.