The FTSE 100 neared an all-time record close on Thursday despite the Bank of England hiking interest rates to 4%.
The Bank of England voted 8-1 to hike rates, with one member voting for a 50 bps hike. The strong consensus around raising rates boosted market pricing for another hike in December, but BoE commentary on the economy and inflation pressures cast doubt on a series of borrowing-cost increases, culminating in a tepid reaction in equity markets.
Interest rate markets were pricing a 44% chance of another rate hike in December at the time of writing.
However, some analysts questioned the case for additional rate hikes, given that much of the inflation filtering through the UK economy comes from overseas and is beyond the reach of BoE policy.
“The impact of a rate hike on inflation is also questionable. The recent resurgence is driven by energy, fuel and other supply factors, and higher rates do not produce barrels of oil or bushels of grain,” said Rob Morgan, Chief Investment Analyst at Charles Stanley Direct.
“There’s a plausible scenario where the bank will need to pivot quite quickly to cutting rates if energy markets fall back into line.”
FTSE 100 record high
Although the slightly hawkish UK interest rate hike hit stocks in the immediate reaction, the FTSE 100 was firmly higher going into the decision and remained 0.6% higher shortly after midday. The FTSE 100 was even flirting with an all-time record high.
While the Bank of England’s decision will dominate headlines for the rest of the day, the key driver of stocks globally on Thursday was the result of the US midterm elections.
“Equities extended their rally for another day as investors lapped up the prospect of a major shift in US political influence and a sharp drop in the oil price,” said Dan Coatsworth, head of markets at AJ Bell.
“Stock markets rallied around the world immediately after the US midterm election results for multiple reasons.
“First, there was relief that Donald Trump didn’t look like he would contest the result. Second, there was an admission from the Republican camp that the Iran war cost them a clean sweep in the election.”
Oil prices
One key driver of UK stocks since the midterm results broke has been falling oil prices, which have helped temper inflationary concerns and reduced the impact of a hawkish BoE today.
“Oil prices remain sharply lower, amid hopes that Trump will refrain from ordering fresh strikes on Iran and that ongoing negotiations will bear fruit,” explained Susannah Streeter, Chief Investment Strategist, Wealth Club.
“The Footsie is on the front foot again in early trade, amid hopes that inflationary pressures on global economies will ease if some kind of resolution to the Middle East conflict is found. The tech-lite nature of the index is also added protection, and is drawing interest, as investors look for more defensive assets while AI jitters continue.”
Most FTSE 100 stocks were higher shortly after midday, with precious metals miners leading the way. Endeavour Mining was again the FTSE 100’s top riser, adding 6.6%. Fresnillo rose 3.3%.
Lion Finance’s rally continued for a second day with another 4% gain.
BAE Systems was the top faller as investors reduced exposure to defence stocks after the midterms.