FTSE rallies 1 as talk on fiscal progress triggers bargain hunting

The FTSE 100 rallied 1% in early trading on Monday as investors started the new trading week on the front foot after positive remarks from US politicians over the weekend helped to raise some muted confidence that US politicians are working progressively towards a solution to the fiscal cliff. This gave investors enough inspiration to buy back into the market and bargain hunt stocks that had been sold off aggressively over the past two weeks to levels which some investors now see as cheap.

By 10am, the FTSE 100 had rallied 57 points, or 1%, closely tracking similar gains in broader European trading where the DAX also rose 1.3%. US futures also moved higher by 0.5%, pointing thus far at least, to a positive start to US trading this afternoon.

From a sector perspective, it’s the heavyweights that are leading the charge higher in trading. That means we have seen 1% plus gains for energy, mining and financial stocks with Barclays topping the FTSE leader board and the bank’s shares moving higher by over 3%.

Too early to read into comments by Congressional leaders
There has been a positive reaction in the markets to the rhetoric over the weekend from US politicians towards a solution to the impending US fiscal cliff. A meeting between Congressional leaders and President Obama emitted positive signs, with both parties keen to show that they can find a ‘common ground’ on taxes and spending cuts.

It is this ‘positive’ rhetoric that has inspired bargain hunting this morning yet it’s naïve to think at this stage that investors fully believe a deal will arrive without hurdles. The Republicans have just lost an election and maintain control over the House of Representatives. They will not easily give up their stance that Obama is pushing for overly aggressive tax hikes.

The rhetoric has, however, been enough to inspire bargain hunting in a market that has seen the UK mining and banking sectors fall 10% and 5% respectively in the last two weeks. Investors have been looking for excuses to buy back in and for now, the Congressional talks appear to have given them that excuse.

We have, of course, seen all of this before. Last summer when talks first started over raising the US debt ceiling, the markets continued to swing like a cork in a bath depending on which side of optimism the rhetoric swung from Congressional leaders and perhaps today’s rally is evidence of this impact re-emerging. It is too early to read into how ‘progressive’ talks will ultimately be at this stage. This still has the potential to drag on and could yet go down to the wire given historical trends on political talks in the US.