Financial companies have been leading the way to help the FTSE 100 index hit another record high, driven largely by the US rate rise and the Dutch election result calming concerns around the eurozone.
The index closed at 7,416 yesterday (16 March) after reaching a peak of 7,445 during the day’s trading.
Since the start of trading today (17 March), the FTSE has been continuing its upward trend, spiking at 7,443.
Financial stocks feature heavily on the biggest riser list, with Prudential, Royal Bank of Scotland, Barclays, and Legal & General all seeing an uptick in share price.
Analysts have suggested the surge could have been partly driven by the Dutch election result, after voters rejected the populist party.
Russ Mould, investment director at AJ Bell, said fears over the long-term fate of the euro have taken a backseat for the time being, which has helped pan-European banking indices rally to 12-month highs.
“Banks are particularly important for the FTSE 100 and a strong performance from them could boost the wider index,” he said, pointing out that banks are the single biggest sector by market cap within the FTSE 100.
Mr Mould said reflation trade continues to dominate, which means the market is still looking for cyclicals, turnaround plays and value names.
“Banks fit the bill on all three counts, especially Barclays and RBS, as they continue to trade below net asset value, in contrast to HSBC or Lloyds which now trade at a slight premium after a strong run.”
According to Mr Mould, banks, miners, insurers and oil represent more than three-quarters of the earnings and dividend growth pencilled in by analysts for this year, meaning it’s these sectors that will set the tone for the FTSE 100 going forward.
Darius McDermott, managing director of Chelsea Financial Services, agreed that the Dutch election would have settled the uncertainty which had built up around the direction of the European Union.
He also said the US rate rise had broadly been positive for financials generally as higher interest rates have meant there are better margins for banks.
“There are some stocks, such as L&G and Aviva, which suffered in the second half of last year due to macro concerns, but actually as underlying companies they are very good companies that are continuing to raise their dividends.”
Yet at an index level, Mr McDermott said he was a little bit nervous.
“Indices are powering on both in the UK and the US and equities look expensive; just because they look expensive today doesn’t mean they can’t get more expensive in the coming weeks.
“Clearly financials have been interesting,” he said, adding that while a rate raising cycle should be supportive of financials, a substantial rate rise doesn’t look like it’s getting close in the UK.
Laith Khalaf, senior analyst at Hargreaves Lansdown, said the UK stock market is in “fine fettle”, adding UK-focused banks have had a good couple of days following the UK's decision to keep rates on hold.
However, he pointed out that the Bank of England’s decision was not unanimous, meaning the market upgraded the prospects of a rise in interest rates which would be good for margins in the banking sector.
katherine.denham@ft.com
