The FTSE 100 reached new record highs, aligning with gains in Japan and the US. Despite these gains, the index trades at 14 times earnings, with gold’s recent bounce potentially aiding the mining sector’s recovery.
Concerns about a bubble are growing as Microsoft and Apple join the $4 trillion market capitalisation club. The market remains robust despite nervousness surrounding tech earnings, contrasting with past instances of ‘irrational exuberance’.
Currency Movements
In related financial news, the GBP/JPY fell nearly 200 pips, and the USD/JPY weakened below 152.50. The AUD inflation data might challenge RBA interest rate decisions, while EUR/USD experienced growth due to US-China trade optimism.
Additional noteworthy events include gold stabilising near $3,950 amidst easing US-China trade tensions, and an impending trade deal between Trump and Xi Jinping. Cryptocurrency markets saw Pump.fun reach above $0.0050, hinting at a possible rally.
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With Wall Street and the FTSE 100 hitting record highs, we should not be fighting this upward momentum, even if it feels disliked. The key is to protect profits against a sudden reversal, especially with major tech earnings on the horizon. We are seeing the CBOE Volatility Index (VIX) hover near 18, a level that makes buying protective put options on indices like the S&P 500 relatively affordable insurance.
Market Strategies
The rally is heavily concentrated in mega-cap tech, with names like Microsoft and Apple pushing the market higher. We remember the lessons from the concentrated rallies of 2023 and 2024; it is wise to trim some exposure by selling out-of-the-money call options against these positions. This strategy allows us to generate income from high implied volatility while retaining the underlying shares for further gains.
While US stocks appear expensive with a forward P/E ratio near 26, the FTSE 100’s valuation at 14 times earnings presents a compelling alternative. A pair trade, going long FTSE 100 futures while being cautiously hedged on US indices, could be a prudent way to stay invested in equities. We are also using gold call options as a hedge, especially as the metal finds support near $3,950 an ounce amidst geopolitical calm that could easily be disrupted.
In the currency markets, central bank policy is creating clear trading signals for the coming weeks. With the Federal Reserve expected to cut rates this week, we anticipate continued modest pressure on the US dollar. We are therefore maintaining a long EUR/USD position, especially after it crossed its 100-day moving average, and are watching for potential weakness in GBP/USD around 1.3280 on fears of a Bank of England rate cut.
