Banks and commodity companies set the pace
Banks and commodity companies set the pace as the FTSE 100 extended its run into record territory on Tuesday, taking the gains for the blue-chip index to 13 per cent since the UK voted for Brexit.
Sentiment towards the FTSE 100 has brightened on optimism over bank earnings as bond yields rise, and on the support a stronger oil price is giving the commodities sector.
“The FTSE 100 is starting 2017 as it left off in 2016,” said Rebecca O’Keeffe, head of investment at Interactive Investor. “Strong upward trends for banks and miners were strongly supportive for investors last year, but it is a much harder call to suggest that they will sustain their relentless progress deep into the new year.”
London-listed companies with earnings in dollars have also been beneficiaries as the weakness in the pound flatters their earnings. In early trading on Tuesday, InterContinental Hotels, the hotel group with significant operations in the US, topped the leaderboard, up 3.8 per cent.
Analysts at Barclays said the stock was the best positioned among its peers to benefit from a potential acceleration in US growth, which president-elect Donald Trump has pledged. The bank also lifted its rating on stock in the operator of the Crowne Plaza and Holiday Inn brands from “equal-weight” to “overweight”.
Among banks, Royal Bank of Scotland rose 1.7 per cent and Lloyds Banking Group was up 1.6 per cent. Commodities trader and miner Glencore was 1.8 per cent stronger. Rolls-Royce, the exporter of jet engines, was up 1.4 per cent.
By mid-morning in London, the FTSE 100 added a further 0.4 per cent to 7,163.82. Although sterling’s decline has helped those companies with big dollar earnings, it has left the index down 6 per cent since June when measured in the US currency.
The mood on the first trading day of the year was helped by better than expected data from the UK manufacturing sector. The December purchasing managers' index from IHS Markit was the strongest since June 2014. It rose to 56.1 from 53.6, eclipsing forecasts of 53.3.
James Knightley, senior UK economist at ING, said the report “suggests the Brexit referendum has not harmed the UK’s manufacturing sector,” with the boost to the sector from sterling’s fall “being seen in the new orders component with export orders performing well”.
Investors will be focused on Wall Street’s opening, with the Dow Jones Industrial Average set to open within about 100 points of the 20,000 level it came close to breaking towards the end of last month. The S&P 500 is also forecast to open higher.
However, given the strong gains for the FTSE 100 index there were also notes of caution. Yael Selfin, head of macroeconomics at KPMG in the UK, identified the resilient UK economy as an important factor in the rally, but warned that “with Donald Trump set to take office early next year, a number of elections taking place in Europe, as well as the triggering of Article 50 on the horizon, we could see further market volatility ahead”.
Meanwhile, the UK-focused FTSE 250 remained unable to break new ground on Tuesday. It was up 0.2 per cent at 18,112.91. It remains more than 150 points off its closing high for 2016, reached in October, lacking the depth of the FTSE 100’s more international make-up.
Richard Hunter, head of research at Wilson King, pointed out that the mid-cap index was “less sheltered by the world economy”, and put the relative underperformance down to lingering concern about the dangers posed by the UK’s departure from the EU.
“The FTSE 250’s lag is notable. It is more than likely that part of it stems from the different picture drawn by forward-looking economic indicators, such as business confidence,” said Mr Hunter. “We know that 2017 will be tough. Until we see signs of how tough the mid-cap index is likely to stay behind.”