The FTSE 100 rose on Tuesday as investors dared to believe the US and Iran are near an agreement that could avoid a series of economically damaging interest rate hikes.
Although oil prices were higher on Tuesday after the US launched strikes on Iranian boats and missile installations overnight, Brent was still below $100 – a key psychological level for investors trying to plot the inflation outlook.
The FTSE 100 was trading 0.6% higher than Friday’s close on hopes that strikes overnight wouldn’t derail a peace agreement that the US says could take a matter of ‘days’.
“The FTSE 100 was playing catch up to European counterparts on Tuesday after progress on a potential agreement between the US and Iran,” says AJ Bell investment director Russ Mould.
“However, continued doubts about the potential for a deal and an overnight pre-emptive US strike on Iran mean any euphoria is being kept in check. It’s telling that other European indices dipped slightly after the gains they enjoyed yesterday when trading in London was suspended for the bank holiday.
“The big gainers on the UK stock market include miners, retailers, housebuilders and real estate stocks.”
These are the sectors most adversely affected by concerns over interest rate hikes stemming from the Middle East conflict and have previously staged sharp recovery rallies on hints of a deal between the US and Iran.
On Tuesday, the reaction wasn’t as strong as it was when a temporary ceasefire was first announced, but there were pronounced gains for IAG, British Land, JD Sports and most FTSE 100 banks.
Kingfisher was the FTSE 100’s top riser after releasing an upbeat trading statement showing the group was navigating a tricky consumer environment.
“Kingfisher’s update paints the picture of a retailer caught between two very different consumer realities,” said Mark Crouch, market analyst for eToro.
“On one hand, households across Europe are feeling the strain from higher borrowing costs and years of cumulative inflation, leaving consumers reluctant to commit to major renovation projects. The late arrival of spring only compounded that pressure by denting footfall and seasonal spending at B&Q.
“On the other hand, there are early signs the backdrop may be becoming a little less hostile. UK inflation recently surprised to the downside, which could eventually ease pressure on household finances.”
Kingfisher shares were 3% higher at the time of writing.