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Global stock markets are hitting new peaks, with the FTSE 100, Germany’s Dax, the S&P 500 in the US and MSCI’s World Index, which tracks equities across the globe, all at record highs.
Investors are shrugging off worries about flashpoints such as North Korea, the uncertainty over the global political situation and latterly the WannaCry cyber-attack to snap up shares.
So what is driving the rise, and can it continue?
China’s $124bn infrastructure project
Over the weekend, the Chinese president, Xi Jinping, unveiled a plan to spend $124bn (£96bn) on infrastructure as part of a $900bn “Belt and Road” initiative, a global construction plan covering 65 countries, from Asia to the Americas via Africa and Europe.
Beijing’s commitment to spend billions of dollars on new roads, ports and other infrastructure is likely to drive up consumption of commodities such as iron ore, copper and nickel.
In turn this has given a boost to shares in mining companies that dig the key commodities out of the ground. And the FTSE 100 is particularly dominated by mining businesses, meaning it gains a particular benefit when the sector is in demand.
European political fears recede
Among political risks worrying investors was the prospect of renewed calls for a break-up of the eurozone, with unpredictable consequences for the rest of the global economy. The prospect of far-right candidate Marine Le Pen, with her anti-EU stance, winning the French presidential election had been hovering over markets for weeks. So when the moderate Emmanuel Macron won, markets rallied in relief.
The forthcoming German federal election has also been in focus. Concerns that Angela Merkel, the chancellor seen as a safe pair of hands by markets, could struggle brought new uncertainty. But over the weekend, Merkel’s CDU defeated its rival SPD in regional elections, suggesting Merkel has little to worry about in September’s poll.
As for the UK election, Theresa May’s Conservatives appear so far ahead that a shock result looks unlikely and investors are hoping a strong Tory majority will head off the threat of a chaotic Brexit.
Oil price recovers on production cuts
Rising production and weak demand had seen oil prices slide to new lows last year, but in November an agreement between Opec and non-Opec producers to cut output for six months seemed to halt the decline. But in recent weeks there had been doubts about the effectiveness of the move, given US shale producers were increasing output and taking up the slack and concerns that the end of the agreement was in sight.
But ahead of an Opec meeting on 25 May, two of the world’s biggest producers, Saudi Arabia and Russia, said they would support a nine-month extension of the output cap until March 2018. They said they would do “whatever it takes” to tackle the global supply glut, and the news sent oil prices soaring.
That, in turn, lifted energy and commodity companies and helped give the markets another lift.
Central banks still supporting shares
Recent strength in the US economy means the Federal Reserve has been happy to start edging up interest rates, and most economists now expect another increase in June. But with some signs of weakness in the first quarter, that may well be the last rise from the US central bank for a while. These small hikes have done little to halt a Wall Street rally and a pause is likely to be welcomed by investors.
Meanwhile, the European Central Bank shows little sign of raising interest rates or halting its bond-buying programme anytime soon. Even if it does begin to ease its stimulus measures in the late summer, investors are likely to welcome the fact that the eurozone economy would be strong enough to absorb such a move.
In the UK, the Bank of England last week suggested rates may rise sooner than the market expected, but economists believe there will be no move until 2019. And with low interest rates and bond yields, investors searching for growth have little option but to continue buying equities.
Even a stronger pound in recent weeks has failed to dent the current rally in the FTSE 100, which has reached 7,500 for the first time. Taken as a whole, FTSE companies make the majority of their earnings overseas, so a weak pound boosts their bottom line and thus their stock prices. Jasper Lawler, senior market analyst at London Capital Group, a spreadbetting firm, said: “Since the snap election was announced, the negative correlation between the British pound and the FTSE 100 has broken down. If the last two weeks are any guide, investors in UK stocks seem to be looking beyond foreign exchange.
“After consolidating in a 350-point range for most of the year, the FTSE 100 could be setting the stage for another surge higher.”
Trump trade continues
Following the election of Donald Trump as US president in November, global stock markets surged on his promises of increased infrastructure spending and tax reforms to boost demand for goods from the world’s largest economy.
And despite his initial failure to pass the healthcare bill, the lack of detail on his economic stimulus plans and the continuing controversies surrounding the president, investors continue to bet that the US economy will keep growing.
The latest set of corporate results on Wall Street were generally positive, with earnings growing at their best quarterly pace in more than five years, according to Thomson Reuters.
Technology stocks continue to lead the way, with Apple recently becoming the first US company to be valued at more than $800bn. Meanwhile, the VIX volatility gauge, the so-called fear index, has fallen to a 24-year low.
US corporate earnings are on track to grow nearly 15% in the first quarter, the best quarterly pace in more than five years, according to Thomson Reuters.