The FTSE 100 surged higher on Thursday after the Federal Reserve cut rates by 0.5% overnight, sending US equities to record highs.
London’s leading index held onto gains despite the Bank of England deciding to leave rates unchanged, opting for the cautious approach after services inflation ticked slightly higher this week.
“As expected, the Bank of England kept interest rates unchanged, opting for a more cautious approach following a small rise in services inflation the day before,” said Isaac Stell, Investment Manager at Wealth Club
“The decision to leave rates unchanged comes despite falling inflation expectations and the Bank expecting slower economic growth in the second half of the year.”
Although the FTSE 100 dipped slightly after the Bank of England’s decision to keep interest rates at 5%, the index remained buoyant after Federal Reserve took the big step of cutting rates by 0.5%.
The 0.5% cut could have been interpreted in one of two ways. The negative interpretation is that the Fed is worried about the state of the US economy. However, markets chose to look on the bright side and welcome the benefits lower borrowing costs will have on the economy.
“The US Federal Reserve’s decision to cut interest rates by half a percentage point is generally winning praise for the signals it sends on the fight against inflation and the pre-emptive, pro-growth nature of the move but it just may be that the central bank has little option, owing to America’s ballooning budget deficit,” said AJ Bell investment director Russ Mould.
The US interest rate cut sparked a risk-on trade in markets on Thursday which was reflected in the FTSE 100’s many cyclical sector leading the index higher.
The mining sector – to some, the ultimate cyclical sector – was out in front, with Anglo-American, Glencore and Fresnillo all trading more than 4% higher at the time of writing.
JD Sports, who have big expansion plans for the US, gained with other retailers on hopes of a boost to consumer spending. Luxury names Diageo and Burberry also received the interest of investors as both rose around 3%.
UK banks were slightly higher after the Bank of England held rates with investors looking forward to higher rates providing support for interest margins for a little longer.
The risk-on trade was underscored by weakness in utility companies and other defensive names. National Grid was the top faller, with a 2% decline.