Why the FTSE has rallied strongly in January

THE FTSE 100 index has gained nearly 7 per cent since 2013 got underway, almost a month ago to the day. This is one of the most impressive starts to a year on record. Only two previous Januaries since the FTSE 100 was formed have beaten the current month (as of the time of writing).

So why the sudden bout of bullishness? And can it continue? This strength certainly comes as a major surprise, and has caught even the most bullish of analysts off guard. Many have been forced to frantically readjust upwards their six month and year-end targets for the index.

And to say that investors have gorged themselves on equities would be an apt description, as the rally to date was ignited by the New Year US fiscal cliff negotiations, which finally resulted in an eleventh hour deal. But, since then, initial strength has continued unabated, with even the odd sell-off being very short-lived.

But other contributing factors have led to this remarkable rally in stocks. First, there’s been a marked change in sentiment towards the larger elephants in the room – such as the Eurozone debt crisis and the prospect of a hard landing for the Chinese economy. This renewed confidence in equities has partly been triggered by comments from the European Central Bank president Mario Draghi, who has been very vocal in saying that he believes the worst of the Eurozone storms are past us now. Further, the Chinese economy is turning itself around after a few quarters of slowing growth.

On top of this, we are in the middle of the current US corporate earnings season. This has seen the large majority of firms beat Wall Street forecasts (albeit from a pretty low base). There has also been talk of a “great rotation” out of bonds into stocks, and this hype is likely to be another reason behind the rally thus far.

All this flies in the face of a UK economy that we now know contracted in the final quarter of 2012, and is heading towards recording a triple-dip recession. Investors have completely brushed this under the carpet, and seem happy to buy UK stocks despite the economic woes we are enduring. Ultimately, the companies that make up the FTSE 100, and even a large chunk of the FTSE 250, are international stocks anyway. So for those investors who believe that the global economic picture isn’t as bad as it was a year ago, those multinational companies quoted in London are likely to attract buyers.

However, as with anything in the financial markets, nothing goes up in a straight line forever. One thing that should be pointed out is that the overall volume of trading has been rather low by historical standards, and so the conviction and sustainability of this rally could be called into question. We also have to remember that there are considerable political as well as economic risks that lie ahead this year, with general elections in Italy and Germany. Whether the FTSE 100 index rises or falls over the coming months, there’s likely to be some bumps along the way.

Angus Campbell is head of market analysis at Capital Spreads. You can follow him on Twitter @AngusCapSpreads

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