Rallying FTSE 100 nears May high

It's Brexit and US rate hike fears running the show right now. Both will reach some kind of conclusion next month when Brits go the polls and Federal Reserve policymakers decide what to do with borrowing costs. What happens over the summer will very much depend on the outcome of both.

But traders have decided to act early and price in good news ahead of the events. The UK will remain in the European Union (EU) and the American economy is strong enough to absorb a piddly increase in interest rates - only the second in a decade.

"The increased probability of a 'remain' vote alongside aid agreement on Greece (albeit somewhat diluted) and a more optimistic view of the US economy have all combined to encourage investors back to the table," our head of investment Rebecca O'Keeffe tells us.

"The major fear over recent weeks has been about the possibility of Federal Reserve moves and what the impact of US rate rises might be. However, these fears appear to be receding as Fed speakers and underlying data confirm the US economy is improving and should therefore be able to withstand prospective rate rises.

"With many investors underinvested, the weight of additional liquidity could provide a boost for markets over the coming weeks."

Up to now, May has looked very much like March, the FTSE 100 only briefly topping 6,200 and sinking to 6,050 or a touch lower. But with Tuesday's optimism spilling over into a second day, the FTSE 100 is at its highest in over three weeks.

Tellingly, it's the banks and housebuilders - two sectors hammered by panic over Brexit - that have been the most impressive performers this month. Berkeley Group, Taylor Wimpey and Barratt Developments are best of the builders, sitting on double-digit gains, but they're weaker Wednesday.

It's the banks that investors want midweek. HSBC is up 3%, followed by Royal Bank of Scotland and Standard Chartered. With Lloyds Banking up a penny at 73.5p, its highest in almost 12 weeks, the government is making a profit on its remaining bailout stake. That puts a retail offer back on the agenda for later this year, if enough of us vote to stay in the EU.

That's all great, but should investors be taken in by this embryonic rally?

Not only do we have two major and potentially historic events next month, but June is also statistically one of the worst months in the calendar year for investors. It's likely why many are keeping their powder dry until there's significantly more clarity.

However, a glance at the chart just above identifies the breakout Tuesday morning, and the tea leaves point to clear air up to 6,350-ish (the downtrend since last April's record high, more visible on the first chart above). It's a point technical analyst Alistair Strang made in an article for Interactive Investor on Monday.

Making a break above that, one assumes, would be incredibly difficult, and not only because of what's coming up. It would take an adrenaline shot of amazing data to inject sufficient oomph to make such a move stick, especially given 6,400 has been a major stumbling block since the plunge below it during the second Chinese stockmarket crash in August.

Market timers could soon be faced with the major dilemma of whether or not to bet against history. They say fortune favours the brave. Opening new long positions heading into June is a brave move indeed.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.