Britain’s FTSE 100 is nearing a record peak

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Britain’s FTSE 100 on Wednesday moved within striking distance of an all-time high as investor optimism that inflation has peaked boosted US and European stocks.

The UK benchmark stock index rose 0.4 percent, leaving it within about 2 percent of its historic peak in May 2018.

The gains in the London market on Wednesday echoed other regional stock exchanges, with the regional Stoxx Europe 600 index adding 0.4 percent and the German DAX 1.2 percent. On Wall Street, the blue-chip S&P 500 rose 0.7 percent in morning trading, while the technology-heavy Nasdaq rose 1.1 percent.

UK markets lagged behind the big rebound in US stocks in 2020 and 2021, which was led by high-growth stocks such as Apple, Alphabet and Tesla. But the FTSE 100 avoided the carnage in global equities last year because it is full of the kind of companies that thrived in an environment where interest rates and energy prices were rising.

Shares of Shell, the major Anglo-Dutch oil company that is the second largest company on the London Stock Exchange, rose 43 percent last year. Banking heavyweight HSBC gained 15 per cent as higher interest rates boosted its earnings. In dollar terms, their gains would have been lower, at 28 percent and 3 percent, respectively.

The gains contrasted sharply with big US companies, with the tech-heavy Nasdaq Composite losing a third of its value last year.

Equity markets on both sides of the Atlantic have advanced so far this year on indications that inflation is easing in many of the world’s largest economies, and despite warnings from the US Federal Reserve and European Central Bank that interest rates should climb further.

Figures released Thursday are expected to show US consumer price growth continued to slow in December. Inflation also appears to have peaked in Europe, with price growth slowing in France, Germany and Spain.

Central bank officials insist it would be premature to stop monetary tightening campaigns just yet. Projections published in December show that most Fed officials expect the federal funds rate to peak between 5 percent and 5.25 percent, up from its current level of between 4.25 percent and 4.5 percent. European Central Bank President Christine Lagarde said in December that markets should expect interest rates to rise “by an average of 50 basis points for a period of time”.

The size of future interest rate hikes – as well as the expected depth of recessions in Europe and the US later this year – now dominate the debate.

“Friendly December [consumer prices index] “Prints are set to raise 25 basis points and that could very well prove to be the end of this cycle,” said Stephen Blitz, chief US economist at TS Lombard. “After the near term, moderate recession or no recession, inflation will stabilize near 3 percent from 2 percent, due to structural imbalances in the labor market.”

Job growth in the world’s largest economy slowed for the fifth consecutive month in December, while wage growth fell to 4.6 percent and the unemployment rate fell to a historic low. Fed officials have made clear that inflation continuing to cool depends largely on unemployment rising later this year, even as the economy grapples with worker shortages in service sectors like hospitality and travel.

In Asia, Hong Kong’s Hang Seng rose 0.5 percent, bringing its gains since the beginning of November to 45 percent. The Chinese CSI 300 index of shares listed in Shanghai and Shenzhen rose 0.2 percent.

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