The FTSE reached new highs on Friday, with the FTSE 100 closing at its highest point in history.
Currently, reports MarketWatch, that U.K. benchmark is sitting at about 7,030 points and edging up, due to mining stocks’ strength.
Still, investors should be cautious, says Tom Elliott, an investment strategist at deVere Group. “We’re nervous [about] buying into a rally that’s less about improved corporate earnings forecasts, and more about [reading into] statements from the U.S. Fed.”
He adds, “We must remember that underlying the rally in risk assets is massive central bank intervention, in the form of ultra-low global interest rates and quantitative easing. This has disabled the financial markets’ ability to signal [real economic] changes.”
Elliott explains the FTSE 100 is currently driven by two main factors. Those are:
1. The dovish tone coming from the Fed. Most notably, there’s been a fall in its projection of future interest rate hikes. And, since most of the world’s cross-border borrowing is done in U.S. dollars, that’s good news for countries running trade deficits, such as the U.K.
2. Low oil prices. The FTSE 100 has benefited from having a sizeable weighting in oil and gas companies (around 15%). That’s dragged on performance over the last twelve months, but a favourable taxation change on North Sea assets by the U.K. government has triggered a rally for the sector, says Elliott.