Having weathered the recent rally in sterling the FTSE 100 reacted on Monday to the ongoing strength of the currency, by falling almost 1%. Giving back some of its recent outperformance from other developed markets. However, Tuesday the 100-index managed to reclaim some of Monday's losses as markets around the globe were cheered by the release of China’s Q1 GDP. China announced that their economy grew by 6.8% in the first quarter, this was ahead of the 6.5% forecast.
Tuesday also saw the release of the February’s UK wage data and this reported that earnings grew on an annual basis by 2.8%. As the headline rate of inflation has fallen back to 2.7%, this would suggest that wages have now caught up with inflation. In turn, this will probably encourage the Bank of England to raise interest rates again in May, which could underpin sterling even more.
One aside regarding the FTSE 100 and UK gilt yields. The focus is mostly on the ten-year maturing gilt, however, glancing at the 50 years the current yield is 1.62%. In 2007 you would have received almost 5%. That implies an equity risk premium in the range of 6%. The equity risk premium is the amount of extra return an investor should take owning equities over risk-free bonds. 6% per annum over fifty years. To justify taking the opposite side of that bet you must have a negative view of the world at large. In theory, the Bank of England should be selling 50-year paper as fast as it can and using it to buy an FTSE 100 ETF, then putting its feet up on the desk for the next fifty years. It is worth noting these points, as when we look back over time one will not be able to contemplate these statistics were possible.
Without wishing to tempt fate there may have been enough bricks put back into the wall of worry for equity markets to rally further. The S&P 500 has climbed back through the technical level of 2675 and the Russell 2000 of smaller cap stocks back through its fifty-day moving average. April is traditionally a good month for stock markets, there seems to be no particular rhyme or reason for that. Perhaps the possibility of sunshine and warmth boosting investors spirits. We shall see if the sun keeps shining.