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%.

Investors raised a glass to JD Wetherspoon on Wednesday after the pub group posted rising sales in their final quarter and announced they no longer required the financial flexibility from lenders demanded by the pandemic.

Wetherspoons said sales for the first ten weeks of the final quarter were 11% higher than the comparable period before the pandemic and 7.4% higher than last year.

The company also sees the pressure of cost inflation easing and anticipates earnings for the coming half-year period to be in line with the most recent period.

“The company expects profits in the current financial year to be in line with market expectations,” said the chairman of JD Wetherspoon, Tim Martin.

“As a result of a continued improvement in sales and a slightly reduced expectation for cost increases, for example energy costs, the company anticipates an improved outcome for the next financial year, and anticipates an outcome for the first half of FY24 approximately in line with the second half of FY23.”

Financial pressures ease

The strong trading performance has helped ease pressure on their finances, and the group now sees no need for covenant waivers from the end of the current quarter.

“A key takeaway from Wetherspoons’ otherwise steady as she goes trading update was the news it is no longer going to be reliant on the slack offered by lenders during Covid as it brings its borrowings under control,” said Danni Hewson, head of financial analysis at AJ Bell.

“The move away from covenant waivers is a sign Wetherspoons has finally been able to put the pandemic behind it, allowing the pubs group to capitalise on an opportunity to draw in more cost-conscious punters and gain market share as a survivor in a sector which has endured an apocalyptic few years.

“Wetherspoons has been particularly exposed to inflationary pressures thanks to a longstanding business model of prioritising volumes over margins, however it is now streamlining its estate, implying an attempt to become a leaner business. There are also encouraging signs that costs are starting to level off.”

Wetherspoons shares were over 9% higher at the time of writing.

Gasification technology company Eqtec (LON: EQT) is selling its market development centre in France to Idex for €750,000 – with €750,000 prior to commissioning. Engineering and licensing revenues of €15m will be generated from the project by 2025. Eqtec also retains a 5% free carry in the project. Eqtec could move into profit in 2024. The share price improved 34% to 0.1775p.

Deltic Energy (LON: DELT) has reported an increased recoverable resource of 99mmboe for Pensacola oil and gas prospect, where it has a 30% working interest. Canaccord Genuity has increased its gross unrisked Pensacola NPV10 value from $450m to $840m. Deltic Energy is likely to farm-down its working interest from 30% to 20% and that would fully finance two wells. Canaccord Genuity has raised its target price from 205p to 240p. The share price increased 28.3% to 29.5p.

Legal services provider RBG Holdings (LON: RBGP) is selling its non-core litigation finance provider LionFish to Blackmead Infrastructure for up to £3.07m. The initial payment is £1.07m with the rest dependent on the cases taken on. This represents a book loss of £980,000. Four cases are retained, and they have a book value of £2.23m. The share price recovered 14.8% to 31p.

Thor Explorations Ltd (LON: THX) produced 23,100 ounces of gold in the second quarter, which was higher than expected. Full year production guidance range is 85,000-95,000 ounces of gold. Capital investment should raise recoveries next year. Exploration continues in order to extend the mine life from four years. The share price rose 13.9% to 20.5p.

Fiinu (LON: BANK) has not been able to raise the cash it requires to reapply for a banking licence. Fiinu has completed the development of the Plugin Overdraft. Costs will be reduced in the company’s subsidiaries. There was cash of £4.3m at the end of June 2023. This is enough to scale down the operations and meet financial obligations. Fiinu will try to secure the finance it requires but it may end up selling the underlying business. The share price dived 72.1% to 1.85p

Steppe Cement (LON: STCM) sold less cement and the price fell. Inflation is running at 15%. The Kazakhstan cement market declined by 5.6% in the first half of 2023 and the company’s sales fell by 11%. Prices were reduced to gain market share. A dividend of 2p-3p/share is still planned by November. The share price declined 17.3% to 31p.

IOG (LON: IOG) has stabilised gas production from the Blythe H2 well and there should be a big improvement in second half revenues of the North Sea oil and gas producer. Bondholder discussions continue. Year end cash could be down to £1m. The focus will be on high-permeability conventional gas opportunities rather than tight gas projects. The share price fell 14.8% to 3.05p.

Chain and transmission equipment Renold (LON: RNO) reported better than expected 2022-23 results after a strong fourth quarter and this year’s forecast was upgraded. In the year to March 2023, revenues improved from £195.2m to £247.1m, while underlying pre-tax profit jumped from £11.5m to £18.6m. a higher tax charge held back earnings growth. This year’s profit forecast has been raised from £14.6m to £16.1m to reflect some destocking as supply chains get back to normal. Debt has been refinanced. The share price dipped 4.48% to 28.8p.

UK banks have passed the latest round of stress testing by the Bank of England that assess the ability of banks to weather adverse financial conditions.

The tests were introduced in the wake of the financial crisis to help prevent the collapse of leading financial institutions during periods of extreme stress. The scenarios tested for are more severe than those experienced during the 2007/08 crisis.

Banks are required to hold certain levels of capital buffers set out by the Bank of England and are regularly tested for shocks to the economy.

“The Bank of England’s latest stress test has shown the UK’s main lenders will be able to stomach worsening economic conditions. This includes the effects of weakening commercial real estate prices, recessions, higher rates and inflation,” said Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown.

“The tests come as a relief during a time that’s been marred by anxiety about regional banking failures in the US as interest rates have shot up in many major economies. A combination of strong balance sheets, healthy asset-classes and a stricter regulatory environment mean the UK’s financial giants also have more room to help customers if things get tougher, including changing the terms of loans if needed.”

Banking shares were among the top risers on Wednesday morning, with shares in Lloyds and Barclays up 2.3% and 1.7%, respectively.

Lloyds said in a statement:

“The Group is pleased to note that it has comfortably passed the stress test and given this strong performance, the Group is not required to take any capital actions. The BoE calculated the Group’s transitional CET1 ratio after the application of management actions as 11.6 per cent and its leverage ratio as 4.5 per cent. Despite the severity of the stress test scenario, and without the conversion of the Group’s AT1 securities into equity, the Group significantly exceeded the capital and leverage hurdle rates of 6.6 per cent and 3.5 per cent respectively.”

The FTSE 100 closed marginally higher on Tuesday as sterling rose after a raft of UK economic data suggested that further Bank of England action on rates is nailed on.

Early weakness in the FTSE 100 due to stronger sterling was bought into by investors and the index closed the day up 8 points at 7,282.

Sterling strengthened after UK wage growth jumped to 7.3% in the three months to May while the unemployment rate rose to 4% over the same period.

Higher wage growth will be a concern for the Bank of England which will watch the reading closely as a gauge of inflation. With wage growth jumping to 7.3% the BoE will have little choice but to continue hiking.

“With sterling at a 15-month high the value of the overseas earnings which dominate the index is relatively less. The reason for the pound’s move higher is today’s UK jobs data,” said AJ Bell investment director Russ Mould.

“While there are some signs the tightness in the labour market is starting to ease, wage growth remains uncomfortably high in the context of the Bank of England’s efforts to get surging prices under control.

“If inflation is like toothpaste, to borrow the well-worn analogy, then the Bank is likely to have to make a big mess of the economy trying to get it back in the tube. Borrowers face more pain with the prospect of further rate hikes to come.”

FTSE 100 movers

Tuesday was a fairly uneventful day for individual movers with Land Securities topping the FTSE’s gainers as the REIT bounced back from a downgrade yesterday.

Highlighting some signs of confidence in the macroeconomic picture, cyclical sectors were among the gainers while more defensive sectors fell.

UK housebuilders Persimmon and Barratt Developments rebounded from some of the worst levels for months.

Unilever, Reckitt Benckiser and ConvaTec Group were among the losers.