The FTSE 100 failed to join in a global equity rally on Friday as markets continued the risk-on trade after a better than expected US CPI data yesterday.
A contraction in UK GDP did little to dent enthusiasm the FTSE 100’s cyclical shares that rose with European and US indices, however, a rotation out of the FTSE 100’s defensive sectors was a major drag on the index.
The lower than expected US CPI data suggests inflation could be turning a corner in the US, which is a precursor for the Federal Reserve pivoting away from their tightening cycle. Yesterday, markets quickly marked down the chances of another 75 bps hike in December.
“For once talk of a pivot by the Federal Reserve might be more than just hot air, with the easing of inflationary pressures accompanied by signals from some Fed officials they might be prepared to ease up on rate hikes,” said AJ Bell investment director Russ Mould.
“Adding to the positive sentiment was further evidence of a softening in China’s zero Covid position, helping the miners to gains on the UK market this morning.”
Miners raced ahead with Rio Tinto, Anglo American and Antofagasta among the top risers. Prudential was the FTSE 100’s top riser gaining 8% on hopes the Chinese economy would reopen again and boost demand for their products.
Ocado continued their march higher and shares were nearly 100% higher than their October lows. Retailers Next and JD Sports were not phased by warnings of a recession and gained over 2%.
The FTSE 100 opened higher on Friday, tracking a monumental session in US equities where the NASDAQ closed up an astounding 7% – but the FTSE’s gains were erased due to weakness in some of the index’s heavyweights.
Defensive sector weakness
The FTSE 100 was dragged by a rotation away from stocks with defensive attributes such as pharmaceutical companies, tobacco and alcohol, and consumer staples.
The prospect of a Chinese economic reopening and a potential Fed pivot saw selling in ‘safer’ stocks including AstraZeneca, GSK, Diageo, Imperial Brands and BAE Systems.
AstraZeneca – the FTSE 100’s largest company by market cap – was down 2.5%.
These companies account for a significant proportion of the FTSE 100 and offset much of the positivity in cyclical stocks.
This defensive composition was central to the FTSE 100 has outperforming the US and many European indices this year, but is also the reason the FTSE’s likely to underperform in a sustained rally.