The FTSE 100 has staged a stunning recovery over the last month and a half. After a solid start to the year in January, the index fell sharply in early February as concerns over interest rate rises in the US spooked global markets. Then in March, talk of trade wars resulted in further declines, with the index falling under 6,900 points towards the end of the month.
However since then, the FTSE 100 has gained around 12% in the blink of an eye to now trade at around 7,700 points. That’s only a fraction below the index’s all-time high of 7,793 points set in mid-January.
So, what’s driving the FTSE 100’s gains and could the index hit a new all-time high this week?
There are two main factors driving the footsie right now. One is the weaker pound. Recent UK economic data has been weaker than expected and, as a result, an increase in interest rates has been pushed back, for now. That’s put pressure on sterling. A weaker pound is generally good for the FTSE 100 as it boosts the international earnings of companies that operate overseas. That’s one reason the index has climbed higher.
Oil price rise
The next factor has to do with the construction of the index. You see, the FTSE 100 is a ‘market-capitalisation weighted index’. In layman’s terms, this means that the largest companies within the index have the most weight and impact on it.
Now, out of all the companies listed in the UK, oil majors Royal Dutch Shell and BP are two of the largest companies. As such, at the end of April, these two companies had a combined weighting of 16.4% within the index.
If you’ve been following financial headlines over the last few weeks, you’ll probably know that the price of oil has surged higher recently, on the back of geopolitical tension across the Middle East. That’s had a positive impact on the share prices of Shell and BP and, as a result, has pushed the FTSE 100 higher.
So looking forward, can the index keep climbing?
Unfortunately, it’s hard to predict exactly what the FTSE 100 will do in the short term.
As I wrote a fortnight ago, on the bullish side, the UK stock market does have a lot going for it right now. It’s cheaper than the US market on a relative basis and global investors are perhaps now realising this. If interest in UK stocks continues to build, the FTSE 100 could break 8,000 points soon.
At the same time, UK stocks can be impacted by the behaviour of US stocks. At present, US investors are calm. Robust economic data, a solid start to the earnings season and easing political tension have stabilised the market. Yet, if volatility returns to US stocks, you can be sure UK stocks will be affected.
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Edward Sheldon owns shares in Royal Dutch Shell. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.