Boom! We’ve just seen the strongest daily movement in UK mid cap stocks since February, with the FTSE 250 index initially jumping 3% on news of inflation cooling more than expected in June. The FTSE 100 advanced 1.3% to 7,548 – a positive move but less pronounced than the FTSE 250 because the blue-chip index has less exposure to the UK economy.
Danni Hewson, head of financial analysis at AJ Bell, said: “The inflation reading has dampened the outlook for interest rate hikes in the UK, much to the excitement of investors. Two-year gilts fell from 5.079% to 4.842%, sterling fell 0.7% to $1.2937 in the space of 20 minutes and interest rate-sensitive stocks soared on the news.
“Housebuilders, including Crest Nicholson, saw gains of up to 7%, while commercial real estate companies such as British Land were close behind, and UK banks advanced by 2% to 3%.
“Investors are taking the view that if inflation is on a sustained downward path, then the Bank of England might be less eager to keep pushing up interest rates. The market is desperate for that pivot moment where central banks call the end to the current rate rise cycle.
“Without wanting to put a dampener on proceedings, we’ve had plenty of false dawns over the past year regarding the ‘pivot’ and analysing trends means looking at multiple data points over many months. Yes, inflation is now much lower than at the start of the year, but June’s 7.9% reading is still considerably higher than the Bank of England’s 2% target. That means further rate hikes cannot be ruled out.
“Nevertheless, stock markets are all about anticipating what will happen next. A further decline in inflation for July could really get the ball rolling for UK equities and lift them out of the mud. While the FTSE 250 is in party mode today, the rally only puts the index back to levels last seen in June.
“Housebuilders had been heavily sold off due to fears a sharp rise in interest rates would destabilise the housing market. While that’s certainly in motion, with plenty of people struggling with higher mortgage rates and a slowdown in property transactions, the valuations of housebuilders were effectively pricing in a deep rut. Today’s inflation news has spurred investors with an appetite for risk to go fishing for bargains in the space in the hope that property market won’t experience a severe collapse.”