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(Alliance News) - Stocks in London ended higher on Thursday after the Bank of England's surprising hawkish turn which lifted the pound and shares in banks.
The Bank of England raised its key interest rate by 15 basis points, despite many observers expecting policymakers to stand pat, as the UK grapples with the emergence of the Omicron variant of Covid-19.
The FTSE 100 index ended up 89.86 points, or 1.3%, at 7,260.61. The mid-cap FTSE 250 index closed up 214.08 points, or 1.0%, at 22,647.96. The AIM All-Share index gained 4.44 points, 0.4%, at 1,168.55.
The Cboe UK 100 index ended up 1.3% at 720.80. The Cboe 250 closed up 1.0% at 20,051.85, and the Cboe Small Companies finished up 0.8% at 14,745.54.
In mainland Europe, the CAC 40 stock index in Paris closed up 1.1%, while the DAX 40 in Frankfurt ended up 1.0%.
"It’s been a strong day of gains for European markets today with the moves higher being led by financials, as well as basic resource stocks, after the Federal Reserve soothed market concerns that they had taken their eyes off the ball when it comes to inflation risks," said CMC Markets analyst Michel Hewson.
"The surprise decision by the Bank of England to raise interest rates has built on this narrative, and while the timing is curious, the decision has helped financials to post decent gains with the likes of Lloyds Banking Group, Barclays and HSBC posting decent gains, as yields moved higher," he added.
The pound was quoted at USD1.3320 at the London equities close, up sharply from USD1.3222 at the close Wednesday, after a surprisingly hawkish turn from the Bank of England.
The BoE's Monetary Policy Committee lifted the Bank Rate to 0.25%, from 0.10%. It is the first rate hike by the central bank since August 2018. Since then, it has cut the key interest rate twice, both in March of last year as the pandemic got underway.
The BoE kept its target stock of asset purchases unchanged at GBP895 billion.
The interest rate hike was favoured by eight committee members, including Governor Andrew Bailey, with just one dissenter, Silvana Tenreyro.
Since the last BoE meeting, inflationary pressures have accelerated, with the consumer price index racing to 5.1% in November, numbers on Wednesday had shown.
The BoE said this triggered an exchange of letters between Governor Bailey and UK Chancellor of the Exchequer Rishi Sunak.
Mike Owens, sales trader at Saxo Markets, said: "The Bank of England took markets on the wrong foot and voted to lift borrowing costs by 15 basis points to 0.25%, delivering an increase that no other G7 central bank has made since the start of the crisis.
"It seems that Bank of England is following the footsteps of the Fed and has finally succumbed to the pressure, biting the dust. But looking ahead, we think this is likely to be a two and done kind of a scenario, and then the central bank is likely to go into a long wait-and-see mode."
In the FTSE 100, high street banks ended among the best performers in the wake of the BoE's rate hike. Lloyds Banking closed up 4.5%, HSBC up 3.8%, Barclays up 3.2% and NatWest up 2.9%. In addition, challenger bank Metro Bank surged 9.5%.
"The Bank of England has raised interest rates from 0.10% to 0.25%. The news is positive for the banks, which, based on the banks' static disclosures, NatWest is the most rate sensitive of the banks and will expect the biggest uplift to 2022 estimates to net interest income at 3.3%. Lloyds and HSBC follow next, both with an estimated 1.2% uplift to NII, with Barclays less rate sensitive with an estimated 0.9% uplift," said Jefferies analyst Joseph Dickerson.
In addition, investment platforms were in the green, with Hargreaves Lansdown up 3.1%. FTSE 250 member AJ Bell gained 3.3%.
International Consolidated Airlines closed up 0.7% even after the British Airways parent agreed to pay EUR75 million to break its agreement to buy Spanish carrier Air Europa.
IAG said it will pay Air Europe-owner Globalia EUR35 million in addition to the EUR40 million break fee that was previously agreed. The pair agreed that the EUR75 million could be applied against any future purchase price, were a new agreement reached for IAG to buy Air Europa.
The two companies had announced on Wednesday they were discussing an arrangement.
At the other end of the large-caps, United Utilities closed down 2.5% after the stock went ex-dividend meaning new buyers no longer qualify for the latest payout.
In the FTSE 250, Domino's Pizza ended the standout performer, up 23%, after the pizza delivery chain said it has reached a "resolution" with its franchisees. In addition, Liberum double-upgraded the stock to Buy from Sell.
The master franchiser for the Domino's Pizza delivery brand in the UK and Ireland said the acrimony with its franchise partners had "held the company back", and it can now "begin a new era".
Under the terms of the deal, Domino's will make a one-time capital investment of about GBP20 million, spread over three years, to boost digital acceleration. It will increase marketing investment and develop an improved new store incentive scheme, to encourage new site openings. The deal runs for an initial three years from January 3.
Domino's also lifted its medium-term system sales guidance to at least the upper end of the previously announced GBP1.6 billion to GBP1.9 billion target. System sales in 2020 were GBP1.35 billion.
On AIM, boohoo Group sank 23% after the online fashion retailer warned that the Omicron variant of Covid-19 is harming sales and as a result lowered its guidance.
The fast-fashion retailer cut annual sales and margins guidance due to Omicron uncertainty and because of a high product returns rate hitting sales. It also acknowledged that "continued disruption" to international deliveries alongside persistent virus-related cost inflation had hampered results.
For the financial year ending February 28, boohoo now expects net sales growth in the 12% to 14% range, cut from previous guidance of 20% to 25% growth.
Compounding boohoo's woes, Investec downgraded the stock to Sell from Hold. In addition, AIM-listed rivals ASOS and Quiz lost 5.2% and 14% respectively in a negative read-across.
The euro stood at USD1.1310 at the European equities close, sharply higher against USD1.1262 late Wednesday, after the European Central Bank signalled it would end pandemic-era stimulus measures in March.
The Frankfurt-based central bank kept the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility unchanged at 0.00%, 0.25% and -0.50%, respectively.
The PEPP, which has a total envelope of EUR1.85 trillion, will be discontinued "at the end of March 2022". Analysts largely had expected the ECB to announce it would call time on PEPP next year, as the central bank edges closer to normalising monetary policy.
However, the ECB will increase its separate Asset Purchase Programme, whose monthly net purchases currently are around EUR20 billion.
APP will be upped to EUR40 billion in the second quarter of 2022, before a slight pull-back to EUR30 billion in the third quarter.
Crucially, the ECB added: "The Governing Council expects net purchases to end shortly before it starts raising the key ECB interest rates."
The ECB has a 2% inflation target and like other central banks, it has grappled with rampant price pressures.
Paul Craig, portfolio manager at Quilter Investors, said: "The European Central Bank is keeping their distance from the Federal Reserve and Bank of England, who are moving to a tighter monetary policy stance. Although inflation is at record-levels for the bloc, ECB board members will be most concerned with the virus outbreak and economic deterioration, in Germany notably.
"Rate increases were clearly never on the table but the wind-down of asset purchases had to be confirmed from the current position which, in our view, is distorting financial markets. Should virus fears recede, 2022 looks set to be a decent year for the bloc economically speaking and as such it is in a good position to begin to scale back the extraordinary support."
Against the yen, the dollar was trading at JPY113.60, down from JPY113.80 late Wednesday.
Stocks in New York were mostly higher at the London equities close following the Federal Reserve's move to a more hawkish stance to combat inflation.
The DJIA was up 0.6%, the S&P 500 index up 0.8%, but the tech-heavy Nasdaq Composite was down 0.5%.
The Fed on Wednesday said it was on track to end its pandemic-era bond purchases by March as the central bank kept interest rates at historic lows. The Federal Open Market Committee decided to keep the target range for the federal funds rate at 0.00% to 0.25%.
In addition, the Fed said it would reduce its purchases of Treasury securities by USD20 billion per month and for mortgage-backed securities by USD10 billion, from the current USD120 billion a month that the central bank currently is buying.
This paves the way for the end its pandemic-era bond purchases in March, as policymakers at the Fed envisage three interest rate hikes by the end of 2022, with further increases in rates expected in both 2023 and 2024.
Briefing.com analyst Patrick J O'Hare said the stock market "is still buzzing" about the decision, "which marked a clear shift to a less dovish policy".
On Wall Street, Adobe was down 9.0%. The computer software firm posted a record performance for its fourth quarter, although net income fell on a swing in tax provisions.
For the three months ended December 3, the San Jose, California-based firm posted net income at USD1.23 billion, down 45% from USD2.25 billion in the same period a year before. This was due to a USD253 million provision for income tax, compared to a USD1.05 billion benefit a year prior.
Diluted earnings per share also declined by 45% to USD2.57 from USD4.64.
Brent oil was quoted at USD74.90 a barrel at the equities close, significantly higher from USD73.30 at the close Wednesday.
Gold stood at USD1,796.70 an ounce at the London equities close, appreciating against USD1,767.04 late Wednesday.
The economic events calendar on Friday has the Bank of Japan interest rate decision overnight, UK retail sales at 0700 GMT and eurozone inflation readings at 1000 GMT.
The UK corporate calendar on Friday has annual results from Ecofin Global Utilities & Infrastructure Trust.
By Arvind Bhunjun; arvindbhunjun@alliancenews.com
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