FTSE hits five year high on surprise BoE split over more bond buying

The FTSE extended gains in early trading on Wednesday despite a big rise in the previous session due to encouraging German sentiment data. Yesterday the FTSE experienced the strongest day of the year so far, however, today has broken through a key psychological level which could result in further moves higher.

Investors will be looking for more signals of improving economic conditions throughout Europe before embarking on the next stage of the equity rally. The eurozone flash Purchasing Managers Index and German business sentiment due out later in the week could provide the evidence that investors are waiting for, but with Italian elections looming at the weekend investors may use this as an excuse to take risk off the table as we head towards the end of the week.

This morning Bank of England minutes showed that the Monetary Committee voted 6 – 3 to leave the asset-buying programme on hold, with three members calling for a further increase of £25 billion to the current £375 billion programme. This greater likelihood of more monetary stimulus was well received by the market. The January Federal Reserve minutes are also due later today and may unnerve the market again as they did last month, should there be much talk regarding the winding down of the US asset purchase programme before the end of the year.

UK jobless claims fell more than twice as much as expected in January, showing a resilient labour market despite the fragile economic recovery. Unemployment dropped by 12,500 from December to 1.55 million and employment jumped by 154,000, the biggest gain since mid 2012. Following this data and the BoE minutes the FTSE was trading up 0.45% and was significantly over 6400.

On the negative side RSA was the biggest faller on the FTSE, dropping a staggering 13% after reporting a fall of 5.9% in full year operating results. It also revealed a 33% cut in its annual dividend due to the expectation of a prolonged period of low bond yields.

The resource sector also put pressure on the UK index following disappointing earnings from BHP Billiton, which reported a 43% fall in half year profits due to weak commodity prices and a strong Australian dollar.  Billiton shed over 2% in early trading whilst sector peers Rio Tinto and Fresnillo dropped 1.3% and 0.5% respectively.

This afternoon investors will be keenly eyeing European consumer confidence data, followed by US economic data which will take centre stage, with the US Producer Price Index and Housing Starts figures being released along with US Federal Reserve Minutes from the FOMC January meeting.