The FTSE 100 surged on Wednesday after US inflation fell further and sent a wave of optimism through markets that the Federal Reserve have sufficient evidence to slow interest rate hikes.
The FTSE 100 was up over 1.5% at the time of writing.
Headline US CPI fell to 3% in June from 4% in May. US Core CPI – the reading closely watched by the Federal Reserve – fell to 4.8%.
The release is good news for US households and US stocks rose as a result. Hopes the trend in US inflation may start to play out across major economies helped European stocks higher on Wednesday. The German DAX rose 1.2%.
Although London-listed shares jumped higher on Wednesday, there is a very different inflation story in the UK and the chances of a major divergence in central bank policy could see sterling run higher against the dollar in the coming weeks and months. A strong pound will put pressure on the FTSE 100.
UK banks
UK banks were among the FTSE 100’s top performers after the Bank of England released stress test results. All banks passed.
“The Bank of England’s latest stress test on the UK’s lenders confirms the country’s banking sector would be able to cope with a significant economic downturn. This will be a relief to people worried about the sector in the aftermath of several banks in US and Europe getting into trouble earlier this year,” said Danni Hewson, head of financial analysis at AJ Bell.
“While everything was fine and dandy in the stress test, the outlook is far from rosy and reality is beginning to approach those stress test scenarios. The more interest rates go up, the greater the risk of some borrowers not being able to repay their debts and the greater the chance of an economic slump.
“UK banks are well capitalised and should be able to continue lending during a more difficult economic environment such as a housing crash and much higher unemployment. However, there is still the risk of greater delinquencies among customers.”
Lloyds shares were 2.75% higher while Barclays added 2.1%.
FTSE 100 movers
The chances of a slowdown in rate hikes by the Federal Reserve sparked a rally in cyclical shares on Wednesday.
UK Housebuilders Persimmon and Barratt Developments were enjoying hopes of lower interest rates with respectable gains. Persimmon was 4% higher.
Anglo American, Glencore, and Antofagasta were the top risers with gains in excess of 4%.
