FTSE Exposure Trumps Domestic Concerns

The UK's premier stock index has risen above domestic concerns such as the recent Budget and weak retail sales thanks to its global exposure and optimism surrounding new US policies under Trump.

Ascending to New Heights

The FTSE 100 commenced the week by achieving its second consecutive record high, with analysts partially pinning the latest gains on the inauguration of US President Donald Trump. This followed a disappointing UK retail sales report on Friday that spurred hopes of interest rate cuts by the BOE in the coming months. The subsequent weakening of the pound was viewed as favourable for UK firms reporting earnings as early reports on Monday suggested that Trump would adopt a more gradual approach to tariffs, leading to a broad relief rally in equities. Large British companies listed on the FTSE 100 with global exposure could be among the most affected by trade wars.

However, the focus on Trump extends beyond trade considerations; approximately a quarter of the revenue for FTSE companies originates from the US, where the expectation of business-friendly regulatory policies under a Republican administration could potentially boost income. Although Trump has discussed tariffs on China, the EU, Mexico, and Canada, there has been no mention of tariffs on the UK. The US actually maintains a trade surplus with Britain, and Trump appears to be targeting economies with which the US has trade deficits. Consequently, the UK may avoid tariffs, potentially aiding FTSE constituents.

Turbulent Times Ahead

The FTSE still retreated from records set earlier this week on the back of weakness in mining companies as concerns over Chinese demand keep copper prices in check. Furthermore, the week-long decline in crude oil prices due to easing geopolitical tensions, expected increased production from the US and Trump's calls for lower prices has had a mixed impact on the Footsie's substantial energy weighting. Lower sales prices are evidently unfavourable. Yet, in the years ahead, the new administration's pro-oil stance could lead to increased production for BP and Shell, which have ample holdings in America.

Meanwhile, the domestic market in the UK is facing a mixed scenario as companies adapt to increased costs from the Budget. The latest employment figures indicated that the unemployment rate rose slightly to 4.4% from 4.3% previously, but average wages also increased, suggesting inflationary pressures. However, these pressures could be mitigated by the declining retail sales last Friday, implying that although British consumers have more disposable income, they are not spending to boost the economy and inflation. Further data may be required to clarify whether the conditions are suitable for the BOE to initiate easing this year, as initially hoped following the retail sales data from last week. Meanwhile, the "relief" rally prompted by the lack of tariffs could stall or even reverse as Trump continues to mull over the application of tariffs.

Triangle Breakout Points Higher

The Footsie's record high follows a symmetrical triangle breakout at 8350 that resumed the upward trend potentially towards 9000, at 8910. If the index breaks past 8600 and 8750 round levels, it could extend its rally to a projection measuring the height of the triangle's open (8480 to 7920) from the breakout point. Meanwhile, revisiting the upper triangle trendline near the breakout point, followed by the 8180 passing through the middle of the triangle, remains a probable scenario without affecting the primary trend. However, each support would require a bearish takeover.

Source: SpreadEx / UK 100

Key Takeaways

Despite domestic concerns at home, the UK’s FTSE 100 has extended to new record highs due to its global exposure and optimism surrounding the US economic outlook. The inauguration of Trump and his business-friendly policies, along with the potential avoidance of tariffs, have contributed to the gains. However, challenges remain, including concerns over Chinese demand, volatility in commodity prices and mixed economic indicators in the UK.