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The UK’s FTSE 100 has kicked off the first week of 2021 with a 6 per cent gain — its biggest rally since the vaccine breakthrough of early November and potentially the start of a turnround after the stock index’s worst year since the financial crisis of 2008.

Higher oil prices and the prospect of more economic stimulus across the Atlantic since Democratic victories in Senate races on January 5 have helped to boost London’s blue-chip benchmark.

Investors say the UK’s trade deal with the EU, struck in late 2020 just before the deadline of leaving the single market and customs union, has also removed a big drag on the index.

“If we go back to the referendum vote, investors have been underweight in the UK due to the uncertainty,” said Dean Cheeseman, portfolio manager at Janus Henderson. “Now the trade deal is done and dusted — it’s a thin deal, but it’s done and dusted — that’s one more uncertainty crossed off.”

Since the UK voted to leave the EU in June 2016 the FTSE 100 has lagged behind global peers, up about 10 per cent, in local currency terms, compared with an 80 per cent rise for Wall Street’s large-cap S&P 500 and a 20 per cent advance for the region-wide Stoxx Europe 600 benchmark.

A recent rebound in global oil prices provided another fillip for the FTSE 100, which has a heavy weighting to energy groups such as Royal Dutch Shell and BP that benefit from higher crude prices.

Saudi Arabia’s pledge this week to slash an extra 1m barrels a day of oil output in February and March, alongside hopes of an uptick in fuel demand as Covid-19 vaccines are rolled out, has helped to stabilise oil prices. Brent crude, the global benchmark, rallied on Friday to a 10-month high of more than $55 a barrel.

The output reduction announced by Saudi Arabia’s oil minister Prince Abdulaziz bin Salman will help to prevent the oil market being flooded, said Mr Cheeseman. “That is beneficial for the UK, because the UK market is about 8 per cent energy,” he said.

The UK index has also been swept up in a global stock rally spurred by expectations that the world’s largest economy is poised to ramp up fiscal spending after Democratic victories in Georgia’s run-off elections gave the party control of both houses of Congress.

“Investors [are] wagering that a Democratic-controlled Congress will pave the way for more fiscal stimulus and thus, a stronger growth trajectory,” said Candice Bangsund, portfolio manager at Fiera Capital.

Tech stocks, particularly in the US, have underpinned much of the global rally over the past 12 months, as Covid-related lockdowns have increased reliance on their products. But investors are now expected to shift into more economically sensitive stocks that feature heavily in the UK markets.

“The lucrative backdrop of stronger, above-trend growth and ample liquidity conditions should ultimately pave the way for further stock market gains in the coming year,” said Ms Bangsund.

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