Can the FTSE 100 Keep Breaking Records?

The record high for the FTSE 100 this week was at odds with other global indices expressing caution amid risk events, with analysts wondering if the low valuations are the secret to success.

Key Factors for the Footsie

• The FTSE 100 shrugged off higher UK inflation figures that left the market priced out of another BOE rate cut this year.
• Gains concentrated among defensive sectors, where large firms gain the majority of revenue from overseas.
• Investors might be rotating out of high-valuation stocks into the comparatively cheap FTSE.

Record High Despite the Data

On Wednesday, , erasing losses earlier in the day in the wake of hotter-than-expected UK inflation data. Inflation in the UK rose to 3.8% from 3.7%, only one decimal above expectations. In the aftermath, futures markets priced out a BOE rate cut this year, down from around a 40% chance of lower rates in December. Under those circumstances, UK stocks would be under pressure. But comparing the FTSE 100 to its mid-size counterpart, an explanation for the outperformance comes to light. The smaller, domestically focused index underperformed, while the FTSE 100 was led higher by internationally focused firms that derive most of their revenue from overseas.

, suggesting it may be transitory. CPI was driven higher by the largest increase in summer airfare prices since 2001, with analysts pointing out that this could be due in part to the timing of school holidays. Not surprisingly, the sector of the FTSE that underperformed on Wednesday was homebuilders. Defence stocks were also under pressure due to hopes of reaching a peace deal in Ukraine. Wednesday's largest gainers represented a continuation of a trend for the leading UK stock index, as health care and consumer discretionary sectors were among the best performers. Large, internationally focused firms such as Unilever and AstraZeneca helped lift the index.

Can the Upward Trend Continue?

Some analysts pointed to the that coincided with the gains in UK stocks, suggesting a rotation out of high-valuation firms into defensive plays, such as United Utilities and British American Tobacco. High-valuation firms, such as AI-reliant stocks, usually benefit from a low-interest environment. If the Fed fails to meet expectations for rate cuts, the Footsie could face pressure. Still, UK stocks are generally undervalued, with the , well below the . The benchmark US index is trading at a valuation not seen since the middle of the pandemic. Further upside for the Footsie might rely on whether the Fed holds the line on interest rates and if markets keep looking for lower-valuation defensive stocks.

FTSE 100 Completing the Breakout

The FTSE 100 pulled back a bit on Thursday amid profit-taking after its Wednesday surge above a long-standing resistance at 9200. If the downward trend reclaims the support, it could push the index down to the lower Bollinger Band at 9130. The pullback allowed RSI to fall out of overbought territory, which could trigger a move up to the upper band near 9370 if the 50 line holds firm. A break above exposes resistance at the psychological 9400 handle.

Source: SpreadEx | UK 100, 4h