Fed’s pledge to keep its foot on pedal lifts FTSE

GROWTH sensitive sectors drove Britain’s top share index to fresh 13 year highs, receiving a boost after the top US central banker reaffirmed his commitment to continued stimulus.

Federal Reserve chairman Ben Bernanke said that central bank needs to see further signs of traction before taking its foot off the gas, helping to spike the FTSE 100 to an intraday high of 6,875.62, its highest level since January 2000.

“Everyone was expecting a bland, non-committal statement, but in the end we got strong confirmation of current policy and basically a green light for risk assets,” Matt Basi, senior sales trader at CMC Markets, said.

“We’re seeing a very strong performance from those sectors that are usually associated with good data, but with poor data across the world the focus is still on central bank stimulus.”

Bernanke’s written testimony offered no sign that he is ready to retreat from the Fed’s latest round of bond buying, although stocks pared gains when he discussed exit strategies in verbal questioning.

Banks and miners were the top sectoral gainers, as so-called cyclicals, sensitive to economic stimulus, led the blue chips higher, shrugging off weak UK retail data.

They combined to contribute over 18 points to a 36.40 point advance on the FTSE 100 index, which closed 0.5 per cent higher at 6,840.27

The banking sector received a lift after state-backed British lenders Lloyds Banking Group and Royal Bank of Scotland agreed plans to shore up their capital with the financial regulator, removing one of the barriers to the government offloading its shares.

Lloyds and RBS traded up 2.3 and 2.2 per cent respectively, with RBS having traded in negative territory before its announcement.

Gains in miners came as copper hit a 6-week high, and the sector rose 1.6 per cent, taking gains since mid April to 9.3 per cent.

Even at these lofty levels, the FTSE 100 is trading at a favourable price-to-earnings ratio compared to when it made its all-time highs 13 years ago, with Beaufort Securities noting that the end-2000 price-to-earnings ratio on UK stocks was 43 per cent higher than now.

If the FTSE 100 was to trade at such multiples today, it would imply an index value of over 9,600, according to Beaufort Securities.

Credit Suisse remains “overweight” in UK equities and anticipates that the FTSE 100 will top 7,000.

“We stay overweight the UK as 85 percent of sectors trade below their global peer group (and) rising inflation expectations should lead to a re-rating of equities,” analysts at Credit Suisse said in a note.