The FTSE rallied nearly 2% this morning, as investors flocked back to equities following a strong bout of profit-taking last week.
The minor stock market consolidation seen at the end of last week opened a window of opportunity for investors, allowing them to buy equities at relatively cheaper prices. We also had some talk over equity market performance in December being historically strong as well as further declines in the US dollar, fuelling risk appetite today.
For those who may not have noticed, US interest rate expectations and the dollar are playing an important role in determining equity market direction. It stands to reason that a low interest rate environment maximises the potential growth rate for a company, as they are able to access funds and expand at a lower cost of borrowing. This is consequently positive for economic growth. In this type of environment investors are likely to move funds out of low yielding assets (such as treasuries) and into higher risk/higher return assets, such as commodities and equities.
Today, we’re seeing a similar story, with industrial metal prices back on the rise as a result of further US dollar declines. One of the best performing metals was gold, which rose to a fresh record high of $1,167.8 per troy ounce on the back of escalating tensions over Iran's nuclear programme. January crude oil (WTI) futures, meanwhile, traded 1.4% higher at $78.52 a barrel.
The increase in commodity prices helped resource shares outperform once again today, with Randgold Resources advancing 4% to 5150p, Eurasian Natural Resources climbing 4.8% to 898p and Lonmin 4.5% higher at 1769p.
Rio Tinto, meanwhile, jumped 3.8% to 3268p after analysts at Morgan Stanley upped their 2009 earnings per share forecast by 17% and 2010 earnings by 18%, citing higher income from its gold production.
Higher crude oil prices helped energy majors advance, with Cairn Energy and Royal Dutch Shell's share price up 2.2% to 2978p and 1.5% to 1852.5p respectively.
Banks were also in positive terrain, with Lloyds Banking Group rising 3% to 90.78p after experiencing 'strong demand' for its £8.78 billion offer to swap existing bonds for Contingent Convertible securities, also known as 'CoCo' notes. Emerging markets focused bank Standard Chartered added 3.3% to 1667p and Barclays gained 3.2% to 314.1p.
Elsewhere, Cadbury rose 1.5% to 812.5p this morning, as investors speculate that US confectioner Hershey will attempt to takeover the UK firm as well. Kraft is also interested in acquiring Cadbury, so things do appear to be heating up a little over here.
By 10.30 am (London time), the FTSE 100 was trading 86.66 points (+1.65%) above its previous close at 5338.07, while the broader FTSE 250 was 87.35 points (+0.95%) higher at 9254.95. In the meantime, December Dow and S&P 500 futures traded between 0.8% and 1% higher, suggesting that Wall Street is likely to open higher as well today.
In the absence of UK data, investors will be keeping an eye out for this afternoon's US existing home sales figures, which are scheduled for release at 3pm (London time). Bloomberg expects existing home sales to rise 2.3% to an annual rate of 5.7 million for October.
