The FTSE 100, the index sometimes referred to as being akin to the UK’s share price, closed at a new record high yesterday. Why?
Bruno was alone in not seeing it coming. Bruno is a dog, owned by an economist. The thing is, just about every economist and their dog had expected US interest rates to go up earlier this week, and yet when rates went along and did the thing that the markets had expected, the FTSE 100 rises, and hit a new high. So, how is it possible for the a widely expected occurrence to have lifted shares – after-all the markets are supposed to allow for things like that? Exclusive research reveals that Bruno, a dog belonging to an economist who worked in the City, had not expected the hike. Maybe that is your explanation.
But in case you are not convinced by that argument, here are other possible explanations.
The Fed said gradual
When the Fed announced the widely expected rate hike, it said that further increases would occur gradually. Gradual is such a simple word, but on this occasion, all that the Fed did was confirm what the markets were already thinking, and yet we are told that the use of this word by the Fed helped lift UK shares – strange indeed.
The Dutch said no to populism
The result of the Dutch election helped, 81 per cent of the Dutch electorate turned out this week and the result was a something of a beating suffered by the Far-Right, populist Freedom Party led by Geert Wilders. This was something of a surprise. Last December the opinion polls suggested that the party was supported by around 23 per cent of the voting population – in the end it garnered just 13.1 per cent of the vote. This means that in Holland at least, the anti EU movement suffered a pretty big set-back. Whatever your thoughts about the EU, in the short term at least, the markets hate instability, and the Dutch vote imposed a little more stability on Europe. Two bigger tests are to follow later this year with elections in France and Germany, but right now, the markets are basking in the glow of the Dutch vote.
The pound stays weak
Sterling remains low – after plummeting against the dollar after the Brexit vote, it has stayed down. And this year, against the euro, it has fallen quite sharply from 1.17 on the last day of 2016, to 1.15 at the time of writing (6.30 am 17th March). A weak pound is good for the FTSE 100, as many of its bigger members enjoy a high proportion of their revenue in dollars, making share prices measured in sterling look more attractive.
Forbes said up
The Bank of England rate setting committee, the MPC, met this week and released minutes. And on this occasion, there was a break in the consensus. One of the nine members, Kristin Forbes, voted for UK interest rates to go up. It was the first time that the decision was not unanimous in a year.
More to the point, the minutes said some members were close to ‘their limits’ for tolerance of higher inflation.
But actually, when you pause, you see that it does not all add up.
Markets bought because in the US the Fed is not likely to increase rates as quickly as pessimists feared, but also rose because there was a hint that UK rates may rise faster than the optimists thought.
But look at it this way, the FTSE 100 rose by just 47 points yesterday, that’s little more than half a per cent – a tiny amount. In fact, the index is up by just 33 points this month.
Sometimes we look for explanations when none are necessary.
Since the UK election last November, the FTSE 100 has increased by 609 points. Now that is significant, and requires explanation. And in fact, it can be explained by sterling weakness against the dollar, expectations that Trumponomics may lift the US economy, but above all, because the economy both at home but also across much of the world has performed better than expected.
But the increases in the index, seen this month require no explanation, when all else is equal the FTSE 100 fluctuates because that is what it does – the force of randomness is at work. And when the index is hovering near a record, no news is required for it to hit a new record.