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Inflation shock hits pound but drives FTSE higher

Inflation shock hits pound but drives FTSE higher

(Update) Political paralysis over Brexit and an inflation shock hit the pound today but lifted the UK stock market with Scottish Mortgage Trust (SMT) leading the FTSE 100 higher.

Having eked out a 0.3% rise yesterday the FTSE 100 extended its gains, rising 0.6% or 46 points to 7,672 as global markets rallied after upbeat comments on the US economy and interest rates policy by Federal Reserve chair Jerome Powell yesterday.

Scottish Mortgage, the £7.8 billion listed global fund that has raced 22% higher this year on the back of its holdings in leading technology disrupters, advanced 2.4% or 13p to 561.5p on broader gains in the tech sector but also forecast-beating results from ASML (ASML.AS), the Dutch manufacturer or chip-making equipment in which it invests.

Positive results from Easyjet (EZJ) and BHP Billiton (BLT) helped bolster sentiment but it was the surprise levelling in inflation and the fall in sterling that boosted the UK stock market with the broader FTSE All-Share index gaining 24 points or 0.6% to 4,224.

The pound tumbled 0.7% to a 10-month low against the dollar to $1.3020, amplifying the value of UK companies' overseas earnings, after annual consumer price inflation held steady at 2.4%, defying economists' forecast of 2.6%.

Although higher energy prices have stoked inflation, this was more than offset by fashion retailers starting their summer sales earlier than expected.

The City immediately scaled back expectations for a 0.25% interest rate rise from the Bank of England next month to 69% from 80%.  

The pound was already weaker on the turmoil gripping the Conservative government with prime minister last night narrowly winning her latest Brexit vote after issuing a back-me-or-sack me challenge to her critics on either side of the debate around the UK's exit from the European Union.

‘There’s certainly a case for higher rates as soon as next month. But I think the decision is more finely balanced than the markets would have you believe. The Bank will be mindful of Brexit-related uncertainty, and may decide to wait for confirmation that the weak first-quarter growth figure was just a blip before raising borrowing costs,’ commented Ben Brettell, senior economist at Hargreaves Lansdown. 

Hamish Muress, analyst at OFX, said 'given ongoing uncertainty around Brexit, the Bank of England may decided that February 2019 is a more appropriate time to hike interest rates.' 

George Brown of Investec Economics thought the Bank would not be deterred. ‘Governor Carney has also recently expressed greater confidence that the first quarter softness was largely weather-related, with subsequent monthly GDP figures further supporting this assertion. As such, we maintain our call for a 25 basis points [0.25%] hike in August.’

BHP Billiton climbed 1.9% or 31p to £16.54 after achieving record annual iron ore production. Chief executive Andrew Mackenzie said that ‘good prices and our culture of continuous improvement give us positive momentum into the 2019 financial year’.

City Index analyst Fiona Cincotta said: ‘High demand for copper and iron ore can be taken as a signal of good global GDP growth as construction tends to flourish only when countries are doing well economically.’

Accendo Markets analyst Mike van Dulken added that the positive outlook from BHP could be read across to other energy and mining shares, which have been hindered by a strong US dollar.

Easyjet gave up much of its early gains after raising profits guidance for the year to £550-£590 million, up from £530-£580 million. After initially jumping 2.8% to £16.99 the shares settled back at £16.63, up 10.5p with AJ Bell analyst Russ Mould warning the budget airline  ‘isn’t immune to pressures from higher oil prices and recurring industrial action’.

Smiths Group (SMIN) slid nearly 9% to £15.94 after issuing a profits warning for its medical division, vainly trying to convince the market the disruption was a one-off effect of European regulation.

Royal Mail (RMG) also saw its shares slide 5.2% or 25.5p to 464p on yesterday’s first quarter update, which showed letter volumes still in decline, in the wake of new GDPR data and communication rules which have impacted junk mail volumes.


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