FTSE 100: Three reasons why the stock index has smashed another record high

The benchmark UK stock index has now gained around 20% since this time last year 

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It’s been on a fierce rally for months and on Thursday the FTSE 100 closed up 0.64 per cent at a new record high of 7,415.95.

The benchmark UK stock index’s gains since the start of the year are 3.8 per cent and since this time last year are about 20 per cent, largely thanks to that dramatic slump in the pound.

Here are the three driving forces behind its latest leg-up. 

A cautious Federal Reserve

Late Wednesday the US Federal Reserve lifted its funds rate by 25 basis points as expected, to a range of 0.75 per cent to 1.00 per cent. But it also said that further increases would only be “gradual”.

A more hawkish approach would have carried the risk of unnerving investors in assets considered relatively risky, like equities, as well as emerging market currencies, stocks and bonds.

Its dovish tone also sent the dollar falling and a weaker dollar tends to make commodities, which are generally priced in dollars, more attractive to buy.

The FTSE 100 has huge exposure to commodity companies so any moves in those stocks are going to have a major impact on the index as a whole.

Shares in Anglo American, Fresnillo, Antofagasta and BHP Billiton, Rio Tinto and Glencore were all up by more than 5 per cent on Thursday morning. On Wednesday, the price of gold enjoyed its biggest daily jump since September.

The Dutch election

Overnight, centre-right Prime Minister Mark Rutte managed to fight off anti-EU rival Geert Wilders in the Dutch election, which some said would deal a blow to anti-establishment sentiment elsewhere in Europe.  

Mr Rutte said that this was an “evening in which the Netherlands, after Brexit, after the American elections, said ‘stop’ to the wrong kind of populism”, according to Reuters.

The euro rallied on the result and stocks right across Europe climbed too.

Fabrice Montagne, an economist at Barclays, said that the outcome suggests “that the rise of populism and fragmentation has been contained” and that this should “bode well for the elections to follow across Europe”.

“The worse-than-expected populist performance should support risk markets in Europe,” economists at UBS wrote in a note, referring to asset classes like stocks.

They did note, however, that “the unconvincing populist performance in the Netherlands may weigh on French voters’ sense of urgency when heading for the ballots for their elections” which could help Marine Le Pen, the leader of France’s National Front, garner support.

The pound’s recent pounding

Finally, a weaker pound is continuing to keep the FTSE 100 propped up.

The pound was this week dealt another blow amid fresh uncertainty around the timing of the triggering of Article 50 and the possibility of another Scottish referendum.

The FTSE 100 is denominated in pounds and so, as a result of the currency’s recent fall, the income that internationally-exposed companies generate overseas becomes worth more when brought back home. In fact, about two thirds of FTSE 100 revenue is generated overseas.

On Thursday the pound was broadly steady, but it remains around 17 per cent down against the dollar since June’s Brexit vote. 

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