Exchange-traded funds tracking the FTSE 100 Index have rallied as the flagship UK large-cap index closed above 7,500 for the first time on 16 May. The ‘Footsie’ ended the day up 0.91%, on 7,522, following a weaker pound after the release of UK inflation figures showing inflation had risen to 2.7%.
The FTSE 100 Index broke through the 7,500 mark for the first time on 16 May, ending the day up 0.91% at 7,522.
The achievement sets a new landmark for the index which continues its impressive winning streak, having smashed through the 7,000 barrier as recently as October 2016. The iShares Core FTSE 100 UCITS ETF (LON: ISF), the largest ETF to track the FTSE 100 with AUM of over £5 billion, has returned 25.6% in the year to 11 May 2017. (See our previous article: “UK large-cap ETFs benefit from record FTSE 100 winning streak“)
An environment of rising inflation typically favours returns from equities over bonds. Unexpected increases in inflation tends to raise the inflation risk premium on nominal bonds, whose cash flows are fixed, thereby raising yields and lowering prices. While the degree to which equities serve as an inflation hedge depends on the company’s ability to pass through higher prices to its customers, research shows that broad market equity investments have historically provided good inflation protection.
Adding to the fuel under the Footsie, the Bank of England has indicated that it is happy to see inflation rise above target rather than risk tightening monetary policy too soon and choking off any potential pick up in the economy. These dovish comments may be feeding through to investors’ perceptions of a stronger bullish run in the economy and stock market.
The FTSE 100 also tends to push higher on the back of weakness in sterling. The large-cap multinationals that make up the FTSE 100 have a tendency to gain from GBP weakness as their exports become more competitive internationally.
Vodaphone was the largest gainer in the index, despite recording a loss for the previous quarter, although the telecoms giant raised profit forecasts for the coming year.
Stocks in the US also briefly recorded a new intraday high of 2,405.77 before falling back during the afternoon session on renewed questions over President Trump and Russia.