FTSE Surges 2% As Sterling Breaks Through $1.30 Support

The FTSE had a lot going for it on Tuesday. Solid results from BP, a battered sub $1.30 pound and a strong start on Wall Street; a positive concoction that helped lift the FTSE comfortably over 7150 to a 3-month high.

The FTSE had a lot going for it on Tuesday. Solid results from BP, a battered sub $1.30 pound and a strong start on Wall Street; a positive concoction that helped lift the FTSE comfortably over 7150 to a 3-month high.

The pound dropped sharply following UK service sector data. The service sector pmi showed that the UK’s dominant sector almost ground to a halt in January. Brexit uncertainties saw clients delaying decisions on new projects and postponing orders which led to business activity in the service sector dropping to its lowest level since the Brexit vote aftermath. With activity in services, manufacturing and construction all sharply lower, we can expect UK economic growth to be virtually non-existent at the start of 2019. 

Weak data wasn’t the only factor hitting demand for the pound. Investors are starting to tire of Theresa May’s circles with Brexit. May will head to Brussels on Thursday to attempt to break the Brexit deadlock. Judging by the weakness in the pound traders are not convinced that she will get very far. A reasonable assumption in our opinion. Instead we are likely to see Parliament propose further amendments next week.

Earnings Boost Wall Street, Despite Alphabet Concerns
Wall Street was also on a firming footing in early trade, despite Alphabet taking a hit. Traders were swiftly selling out of Google’s parent company following some eye brow raising results. Whilst Alphabet beat on earnings and revenue jumped 22%, costs were also up 26%. Cost growth outpacing revenue growth is unnerving investors, even if the reason is a move into more costlier areas such as cloud services and self-driving cars. 
However, more broadly investors were happy to look beyond Alphabet, as corporate earnings continued to roll in.  The Dow was up over 150 points at the time of writing.

State of the Union Address
Investors will now look ahead to the annual US State of the Union address by Trump at 9pm ET.  There are two areas which will be of particular interest to the markets. Firstly, any comments on trade policy and secondly the outlook for the wall with Mexico. Trump has mentioned on many occasions that he is willing to use emergency powers to build the wall. Trump may consider this an appropriate platform for such an announcement.  The latter, increasing tensions between Democrats and the President would be considered negative for risk, potentially boosting flows into gold. Meanwhile any positive comments regarding the US -Sino trade developments are likely to boost risk sentiment with US indices the favourite to benefit.  However, should both the wall threat and US – Sino trade developments appear in the address then we expect this to be a dollar neutral event. 

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