London’s FTSE 100 closed at a new record high on Wednesday, fueled by growing expectations of a Bank of England interest rate cut as early as March following signs of cooling inflation, while mining stocks surged on rising metal prices.
The blue-chip FTSE 100 index finished up 1.2% at 10,686.18 points, marking a record for the second consecutive day. The mid-cap FTSE 250 index rose 0.5% to its highest level in four years.
London-listed mining stocks led the gains, with Antofagasta and Anglo American rising 10.5% and 4.6% respectively, as copper prices climbed. Glencore increased by 4.4% after reporting slightly lower-than-expected annual profits and announcing a $2 billion shareholder distribution.
“Investors continue to pile into UK assets, which rarely include struggling tech or software stocks and instead benefit from high energy and precious metal prices,” said Axel Rudolph, senior financial analyst at IG. “With valuations at around half those of their US counterparts, UK equity indices remain an attractive proposition for many investors, pushing the FTSE 100 towards new records, close to the 11,000 mark.”
The surge in commodity-linked stocks, better-than-expected earnings, and prospects of looser monetary policy helped British equities recover from a dip last week, when concerns about potential disruption from AI in various sectors weighed on sentiment.
UK inflation slowed to 3.0% in January, the lowest level in nearly a year, driven by more moderate increases in transport, food, and non-alcoholic beverages, according to the Office for National Statistics. This figure met expectations.
The pound fell against the dollar as traders priced in nearly an 85% probability of a rate cut in March. A weak labor market report released on Tuesday had already put pressure on the currency.
Defence stocks rose 2.7%, with BAE Systems up 3.9% after reporting annual operating profit growth that exceeded expectations, as global demand drove its order backlog to a record £83.6 billion ($113.4 billion).
The FTSE 100’s performance stands in contrast to earlier concerns about the impact of artificial intelligence on the UK market. Recent weeks saw anxieties over potential disruptions caused by AI technologies, particularly in sectors reliant on traditional business models. However, the current rally suggests investors are reassessing these risks, potentially viewing the UK market as less vulnerable to AI-driven upheaval than its US counterparts.
The Bank of England’s Monetary Policy Committee (MPC) last met with a split vote of 5-4 to hold rates steady versus a cut to 3.5%. The recent data, including the inflation figures and the labor market report, is expected to sway at least one member of the MPC towards supporting a rate cut at the next meeting. Market expectations for a cut in March are now around 85%.
The broader European market also experienced gains on Wednesday. The Cac 40 in Paris closed 0.8% higher, while the Dax 40 in Frankfurt ended up 1.1%. This pan-European rally suggests a broader shift in investor sentiment driven by the prospect of easing monetary policy across the region.
The FTSE 250, representing mid-sized companies, also saw positive movement, closing up 0.6% at 23,686.44. The AIM all-share index closed up 0.6% at 811.74. This indicates that the positive sentiment is extending beyond the largest companies in the UK market.
While the FTSE 100’s surge is largely attributed to the prospect of rate cuts and rising commodity prices, analysts also point to the relatively low valuations of UK stocks compared to their global peers. This makes them an attractive investment option for international investors seeking value.
However, some analysts caution that the rally may not be sustainable. Concerns remain about the long-term impact of Brexit on the UK economy, as well as the potential for further geopolitical instability. The upcoming economic data releases will be crucial in determining whether the FTSE 100 can maintain its upward momentum.
The recent cooling of UK inflation, coupled with the Bank of England’s potential shift towards a more dovish monetary policy, has created a favorable environment for UK equities. However, investors will be closely monitoring economic data and geopolitical developments in the coming weeks to assess the sustainability of this rally.
