Stocks in London closed in the green on Thursday, fired up by Fed-prompted highs despite a more guarded outlook on rate cuts from the Bank of England.
The FTSE 100 index rose 75.04 points, or 0.9%, at 8,328.72. The FTSE 250 ended up 327.40 points, 1.6%, at 21,162.71, and the AIM All-Share gained 5.52 points, or 0.7%, at 748.08.
The Cboe UK 100 rose 0.9% to 833.99, the Cboe UK 250 advanced 1.5% to 18,660.12, and the Cboe Small Companies ended up 0.4% at 16,738.42.
In European equities on Thursday, the CAC 40 in Paris jumped 2.3%, while the DAX 40 in Frankfurt closed up 1.5%.
On Wall Street at the time of London’s close, the Dow Jones Industrial Average was 1.0% higher, the S&P 500 was up 1.7%, notching another intra-day high, while the Nasdaq Composite climbed 2.8%.
London’s blue-chip index had earlier posted triple digit gains fuelled by the bumper-sized interest rate cut in the US.
The central bank reduced the federal funds rate to 4.75%-5.00% from 5.25%-5.50%, where it has been since July 2023.
The vote was unanimous, bar Michelle Bowman, who preferred a 25bp cut.
Fed Chair Powell said there had been ‘broad support’ for the decision, after a discussion which saw a lot of ‘back and forth’.
The Fed indicated through its ‘dot plot’ the equivalent of 50 more basis points cut by the end of the year.
The cut comes as the US central bank tries to engineer an economic soft landing amid concerns the economy, and the labour market in particular, is slowing
Citi’s Veronica Clark said the cut completes the Fed’s ‘hard pivot away from concerns over upside risk to inflation and toward downside risk to the labour market’.
She thinks weaker labour market data over the coming months will have Fed officials cutting rates by 50bp again in November.
Powell said rates were not on a ‘preset’ path, noting that if inflation proved sticky the Fed could ‘dial back policy restraint more slowly’.
JPMorgan, one of the few Wall Street banks to correctly predict a 50bp cut this time around, thinks another super-sized cut is possible in November.
‘Our expectation for a 50bp cut at the next meeting in early November is contingent on further softening in the two jobs reports between now and then. More benign labour data would, instead, seal the case for the FOMC’s goldilocks scenario of 25bp eases per meeting over the remainder of the year,’ said JPM’s Michael Feroli.
Data on Thursday showed a surprise drop in weekly jobless claims.
In the week ending September 14, the advance figure for seasonally adjusted initial claim was 219,000, down from the previous week’s revised level of 231,000, data from the Department of Labor showed.
It was lower than the FXStreet-cited consensus which had pencilled in the figures to remain flat at the previous week’s formerly reported figure of 230,000, before Thursday’s upward revision.
In London, the Bank of England played a straight bat, leaving interest rates unchanged, as expected, and suggesting a more gradual approach to rate cuts in the future.
At its September meeting, the BoE’s Monetary Policy Committee voted by a majority of 8 to 1 to maintain bank rate at 5%. Swati Dhingra voted for a 25 basis points cut.
In August, the MPC had voted 5 to 4 to cut bank rate by 25 basis points to 5.00%. In its previous seven meetings, it had voted to keep bank rate at the 16-year high of 5.25%.
In a statement, the BoE said there has been limited news on the UK economy since the August meeting.
As a result, ‘in the absence of material developments, a gradual approach to removing policy restraint remains appropriate’, the BoE commented.
Rob Wood at Pantheon Macroeconomics said the vote came with more ‘hawkish guidance than expected’.
He felt the accompanying statement, pointing to a gradual approach to removing policy restraint, suggests a relatively high bar to cutting in consecutive monetary policy meetings.
As a result, he expects a cut in November and three further reductions in 2025.
But ING thinks the pace of cuts could pick up if progress on reducing inflation continues.
‘The Bank of England may have got a head-start on the Federal Reserve, but the tone from UK policymakers is still much more cautious. Later this year, however, we think the Bank will be more confident in the inflation outlook and will be content with accelerating the pace of cuts,’ analysts at ING remarked.
Speaking to broadcasters, Governor Andrew Bailey said: ‘I think we’re now on a gradual path down. That’s the good news. I think interest rates are going to come down. I’m optimistic on that front, but we do need to see some more evidence.’
The differing rate path sent sterling up, briefly hitting its highest level sine March 2022, and prompted mixed fortunes for the dollar.
The pound was quoted at $1.3268 late on Thursday afternoon in London, up compared to $1.3198 at the equities close on Wednesday. It earlier rose above $1.3300.
The euro stood at $1.1145 up from $1.1113 on Wednesday. Against the yen, the dollar was trading at JP¥142.94, up compared to JP¥141.97.
On London’s FTSE 100 Next rose 0.5% after earlier hitting a new record high on strong trading.
The Leicester-based clothing and homewares retailer raised its profit outlook for the second time in two months on the back of strong sales over the past six weeks.
Full prices sales during the first six weeks of the financial second half have ‘materially exceeded our expectations’, rising 6.9% on-year, the firm said.
Next now expects full-year full price sales growth of 4.0%, its outlook improved from 3.4%.
Next now predicts pretax profit of £995 million, which would be a year-on-year rise of 8.4%. The outlook was improved from £980 million. In August, Next had increased guidance by £20 million from £960 million.
‘The company continues its mantra of under-promise and overdeliver,’ said Panmure Liberum analyst Anubhav Malhotra.
Rolls-Royce rose 5.4% supported by news is on track to secure the first order from a European government to build a fleet of mini nuclear reactors after being selected as the preferred supplier in a competition overseen by the Czech government.
The UK aerospace and defence group beat six other rivals to seal the agreement with state utility CEZ Group, it said in a press release.
‘Discussions are ongoing to finalise contract terms and the final agreements are subject to customary regulatory clearances,’ the firm added.
Ocado added 2.8%. It said revenue at its retail joint-venture surged in its third-quarter, and the outlook for the full-year has been lifted. Ocado Retail’s revenue rose 16% to £658.0 million in the 13 weeks to September 1, from £569.6 million a year prior.
Ocado Retail is a joint-venture between grocer and warehouse technology firm Ocado and retailer Marks & Spencer.
Volume and average orders each grew 15%, while active customers climbed 10%. Looking ahead, Ocado Retail is now expected to deliver low double digit revenue growth for the full-year, the outlook raised from mid-high single digits growth.
M&S shares rose 1.4%.
Barclays said: This is a very positive release from Ocado Retail and a sign that the business is executing well. Double-digit volume growth matters both for both retail margins and for broader sentiment. We see it as a positive sign that the retail business can accelerate growth after cycling through tough pandemic/cost of living comps for Ocado’s International partners using Ocado’s CFC solution.‘
The weak dollar supported the gold price. The yellow metal climbed to $2,585.15 an ounce on Thursday, up from $2,569.38 at the time of the London close on Wednesday.
Brent oil was quoted at $75.05 a barrel at the time of the London equities close on Thursday, up from $73.03 late Wednesday.
The economic calendar for Friday sees interest rate decisions in Japan and China, UK retail sales and borrowing data and Canadian PPI numbers.
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