UK set to slash rates ahead of US

The FTSE 100 enjoyed a record high today of 8,076 points – up 29 points from its previous peak of 8,047 in February 2023.

The 40 year old exchange enjoyed an uplift in share valuation primarily driven by fresh hopes of UK interest rate cuts, with the first anticipated as early as August.

UK business activity also exceeded that of analyst expectations in April, with the S&P Global Flash UK composite output index rising to 54 in April from 52.8 in March.

Market sentiment also enjoyed recent news from the Office for National Statistics (ONS) that showed borrowing hit around £121bn in the financial year just ended — a decrease of £8bn on the previous year.

It should also be pointed out that the FTSE 100 is commodity heavy; with Shell responsible for almost a third of the index’s 2024 gains. Valuations were also bolstered by a change in appetite from traders switching out technology stocks for commodities (crude oil prices rose higher than $90 a barrel in April).

What can be considered by many as welcome news - the rally which swept up most of the FTSE 100 came as the dollar extended recent gains against the pound. This is because the majority of constituents derive their revenues in foreign currency, therefore benefiting from a weaker exchange rate in return.

Fundamentally driving the pounds weakness against the dollar is what analysts term as ‘rate differentials’. With US options markets now expecting a 1/5 chance of a rate hike - not cut - within the next 12 months due to higher than expected economic data, traders are therefore betting on the UK pursuing a more hawkish approach to rates relative to their US counterparts.  

Yet, it’s important to ask the question whether this good news on the horizon is more reflective of the BoE’s acknowledgement of an economy struggling to wade its way out of stagflation, more so than a return to economic growth.

Post pandemic, the UK has 400,000 fewer workers contributing to the economy than it did before, a shrinking equity market and the highest tax burden since World War Two.

And yet, some analysts suggest that in reference to last week’s tech sell off, with the likes of the Magnificent Seven accounting for 37% of the S&P 500’s 10.2% gain during Q1, US equities may be overvalued and that a correction may be in order.

With UK equities valued at an attractive discount, alongside potential rate cuts on the horizon with a government in waiting, the UK may indeed be on to brighter pastures, but important structural problems still need addressing.