The S&P 500, Dow Jones Industrial Average and NASDAQ Composite indices all closed at record highs on Monday, but does good news for US equities mean the FTSE 100 is about to eclipse its own record level?
Well, there isn’t far to go as the index is within 4% of its all time intraday high set back in October. So, what’s been driving equities on both sides of the Atlantic higher and higher over the past few months?
The answer for US markets has been Donald Trump’s victory in the Presidential campaign. Trump has yet to make many concrete policy promises, and analysts have filled this void with speculation that range from a massive fiscal stimulus programme to rolling back financial regulations and major corporate tax cuts.
Any deregulation of the financial industry would also have far reaching effects for UK banks as the likes of Barclays, HSBC and Standard Chartered could be freed from some of the onerous trading and capital requirements that have impinged investment bank profits for several years now.
Rebounding commodities
Here in the UK the most significant reason, and one which has already been discussed ad nauseam, is the weak pound. The pound has slumped more than 15% against the US dollar since the EU Referendum, which is good news for FTSE 100 companies that on average bring in 70% of their sales overseas.
But, it’s not only the weak pound sending shares of the UK’s largest companies to new highs. The rebound in commodities prices since the start of the year is big news for the miners that have long dominated the top echelons of the FTSE 100 when measured by market cap. The Bloomberg Commodity Index has risen nearly 18% from January lows, propelling shares of BHP Billiton up 110%, Glencore 250% and Rio Tinto 80%.
After two years of slumping oil prices depressed shares, oil majors are once again pulling their weight as well, with Brent crude prices having risen from their $29/bbl January low to $49 today. Shares of mega producers BP and Shell have risen 34% and 49%, respectively, due to this rally and increased analyst hopes for a definitive OPEC supply cut agreement.
Up in the air
But will all of these moving parts continue to work in favour of the FTSE 100’s mega cap companies? I have my doubts. Whether Trump will propose — much less succeed in passing — any of the plans analysts are predicting is very much up in the air. Furthermore, the effects of these plans on UK equities wouldn’t be all that significant.
And, while the pound may trade at depressed levels for some time, which will help foreign earners, the rally in commodities and oil prices may not have much further to run. US shale producers have been shown to ramp up production once oil reaches $50, and it remains unlikely that OPEC countries will sign up for a steep enough supply cut to counteract this. Furthermore, while commodities have rallied on the supposed US infrastructure binge about to come, falling Chinese demand is likely to more than outweigh any gains.