Spread betting – will the FTSE 100 hit the 7,000 level again?

After a nice run last week, the FTSE 100 rose again on Monday. But the question now is whether the blue chip index can power on to break the psychologically important 7,000 barrier.

MKT-3428_Brexit-AreThese3BiggestTrades_BlogPage

US stocks have lit the way again, with all three major indices rocking record highs last week, while European stocks touched  7-week highs as a rally in oil prices supported the risk-on mood. Data from China and Japan has been less encouraging, but equity prices seem to be increasingly decoupled from fundamentals.

Supporting the case for the FTSE is a combination of a weak pound and collapsing bond yields.

Cable is trading below $1.30, close to a 31-year trough. The weak pound helps a good portion of FTSE 100 companies as foreign currency earnings are translated into sterling for reporting.

Meanwhile, the hunt for yield continues. Investors hungry for any kind of return are looking to equity markets and the FTSE 100 has plenty of high dividend appeal.

The FTSE All-Share Index is yielding around 3.8%, while the return on 10-year Gilts is hovering above 0.5%. Capita UK Dividend Monitor suggested that there would be a dividend windfall from the slump in sterling as around two-fifths of dividends are declared in dollars or euros, although dividends may not be secure looking further ahead.

Last week the Debt Management Office sold £850m of Gilts maturing in 2036 at a yield of -1.72%.

Yields on UK government paper have fallen dramatically since the Bank of England reignited its quantitative easing programme.

And with the Bank likely to hoover up more bonds, the yields may fall further. Pension funds with big liabilities are not that keen to sell, so the Bank may have to pay ever higher prices to get its hands on them.

The £10bn foray into corporate bonds should also support dividends and buybacks, offering further succour to equity prices.

But are stocks overpriced? In the US, five quarters of earnings declines certainly make them look a little pricey. But what’s the alternative? Compared to bonds they don’t look quite so expensive.

And the UK market is increasingly displaying the same characteristics. Price to earnings ratios have exploded this year. From bouncing around the mid-teens for years, P/E has shot up to almost 40 as earnings have missed their mark.

Current dividend cover looks very thin at present and earnings will have to pick up. Cover has slipped below 1, down from 1.63 a year ago.

A sustained rally in oil prices and UK house prices would be welcome, but not to be relied upon. Indeed Rightmove followed Halifax in saying prices slipped in July, indicating that the Brexit vote will hit the property market. Prices fell 1.2% in the four weeks to August 6th, according to the house buying website.

Nevertheless, as government and corporate bond yields tumble, in the short term UK equities may look more and more appealing to yield-starved investors.

 

Any information, analysis, opinion, commentary or research-based material on this page is for information purposes only and is not, in any circumstances, intended to be  an offer of, or solicitation for, a transaction in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. Any person acting on it does so entirely at their own risk and ETX Capital accepts no responsibility for any adverse trading decisions. You should seek independent advice if you do not understand the associated risks.