New year adds fizz to stock market rally

Shares across the world have made a powerful start to the year as economic data from three continents buoyed hopes that faster global growth will push stock markets to new all-time highs.

Widespread optimism over the prospects for the world economy showed little sign of abating on Friday even after mixed US jobs data, with the benchmark US S&P 500 and the UK FTSE 100 entering new record territory.

Over the week, positive economic news in Europe and China helped reinforce an ebullient mood for markets already invigorated by US tax reforms, with the FTSE All-World index notching up 14 straight months of successive gains.

Global growth is also contributing to rising demand for oil, helping push Brent crude to its highest level since 2015 and towards $70 a barrel.

The FTSE All-World equity index rose 2.7 per cent over the week, while for the same period the S&P 500 gained 2.6 per cent, as the US benchmark made its best start to a year since 2010.

Donald Trump, keen to distract attention from disparaging revelations in a new book about his presidency, took to Twitter to claim credit for the market rally, linking it to his political programme. The administration’s recent tax cuts have raised market expectations that higher future corporate profitability will underpin soaring valuations.

“This is all about the Make America Great Again agenda! Jobs, Jobs, Jobs. Six trillion dollars in value created!” Mr Trump declared.

US jobs and wages data on Friday showed average earnings growth at 2.5 per cent in December, as expected, but a miss for headline job creation was shrugged off by the market as unemployment remained steady at 4.1 per cent — a level last seen 17 years ago.

The continuing rally for financial assets has been helped by a growing consensus that stronger growth means the era of ultra-low interest rates following the global financial crisis is coming to a close.

Further evidence came out of Canada on Friday which reported stronger than expected jobs growth, propelling the Canadian dollar 1 per cent higher against the US dollar and fuelling talk of a rate rise this month.

Michael Sneyd, a strategist at BNP Paribas, said strong US and European manufacturing data at the beginning of the week had helped support widespread market optimism.

“The data has been very solid and that’s encouraged investors to start the year on a risk-on theme, particularly with emerging market currencies and equities doing very well,” said Mr Sneyd. While there was talk about whether equities were in a “euphoric bubble”, equity prices were rising “because global growth is strong”, he said.

Not all investors have fully embraced the idea that current soaring equity valuations are justified by data, with Jeremy Grantham of the US investment house GMO, claiming this week that markets were in “a bubble” but that the rally could still continue for some time.

“A melt-up or end-phase of a bubble within the next six months to two years is likely,” he wrote in a letter to his clients. “If there is a melt-up, then the odds of a subsequent bubble break or meltdown are very, very high, ie, over 90 per cent”.