Barring a dramatic late reversal, the FTSE 100 is set to end the week firmly higher as the index seemingly continues to follow the path of least resistance in trending upwards. The inverse correlation with the GBP, which has been evident for many months now may be subsiding somewhat with the value of sterling also up on the week.
Markets look through economic release
The only real UK economic data of note this week has shown better than expected strength in the manufacturing and construction industries. UK manufacturing production month-on-month rose by 2.1% for the month of December - the highest reading since the EU referendum. In addition, construction output unexpectedly grew by 1.8%, whilst the industrial production figure supported last month’s robust reading in rising by 1.1%. The releases have had little impact on the FTSE 100 or the pound, with the latter in fact falling lower in the hours that followed after an initial pop up. This could be a case of profit taking going into the weekend, with the pound showing gains against all its major peers barring the US dollar for the week.
GBP-FTSE correlation weakens
Ever since traders cottoned onto the fact that a falling pound boosts earnings denominated in foreign currencies, the FTSE 100 and pound sterling have strongly diverged with the former rallying and the latter sinking. Despite this they’ve both risen this week as the relationship seems to have weakened somewhat. In times of turmoil, or when there is one single factor predominantly driving markets, correlations typically rise (think US assets post-election) and this was illustrated brilliantly in the FTSE-GBP correlation. Whilst it is far too early to call one week’s positively correlated moves an end to the long standing relationship, it does perhaps reveal that markets are starting to trade more independently and focus on something other than the Brexit.
External factors usurp Brexit developments
The pound has risen the most against the New Zealand dollar out of all G10 currency pairs this week, largely due to the Kiwi tumbling after the Reserve Bank of New Zealand (RBNZ) rate decision. The base rate was kept on hold at 1.75% but some dovish rhetoric from Governor Wheeler in which he stated that the currency “remains higher than sustainable” and that the “policy may need to adjust” caused a depreciation. As for the FTSE 100, news from outside these shores has been the single largest determinant this week with Donald Trump’s promises of doing something “phenomenal” on tax reform within the next 2-3 weeks adding more fuel to the global stock market rally which boosted shares not only on Wall Street, but also from Tokyo to London. This is not to say that the latest twists and turns in the Brexit bill are irrelevant, but it now seems ever more likely to pass through parliament without a hitch and allow Theresa May to invoke Article 50 by the end of March. Whilst this progress will likely bring forward the inevitable uncertainty that will occur during the 2 year window for negotiations on the terms of the separation of the UK and EU that will begin once Article 50 is invoked, this seems to have been meet with a mildly positive response in the markets, albeit one that is not strong enough to be the dominant force on flows.