Why FTSE 100 is treading water

Reaction to an impressive US earnings season has been disappointing, but there are still reasons to be optimistic.

A sell-off has taken the heat out of valuations, which removes one angle of attack from the bears. The Federal Reserve's latest decision to keep interest rates on hold also implies future hikes this year will match expectations, which should calm nerves around possible policy mistakes and keep this bull market running for at least a little while longer.

Inflation is nudging the Fed's 2% target, which policymakers are clearly comfortable with, and despite a weaker first quarter GDP read last month, the US economy is still tipped to pick up through the year.

Source: interactive investor        Past performance is not a guide to future performance

Despite some scepticism around equity valuations, there's still little to challenge shares as an asset class, and a weak pound should underpin the UK market.

Sterling is down over 5% from its post-referendum peak just a fortnight ago, and it's difficult to see much of a recovery near-term following poor GDP data, falling inflation, and a period of political instability as we near Brexit in 2019.

It makes a rate rise by the Bank of England next week incredibly unlikely.

It's trade rather than interest rates or valuations that are troubling markets right now. US officials have flown into Beijing to try and deescalate a trade spat with China, but these talks won't be easy.

This is the issue that markets are super sensitive about currently, and which was responsible in part for the first-quarter crash, so it's unsurprising to see investors take some money off the table.