Shares of UK companies whose fortunes are tied to interest rates soared after data showed a softening in British inflation a day before the Bank of England’s latest policy announcement.
An index tracking housebuilder stocks jumped more than 5% in early trading as the 5-year sterling overnight indexed swap rate — a benchmark used to price mortgages — headed for its biggest drop in a month, falling 11 basis points. Builders Taylor Wimpey Plc and Persimmon Plc led the charge, alongside gains for highly leveraged real estate investors like Land Securities Group Plc and British Land Co.
Domestic-focused lenders Lloyds Banking Group Plc and NatWest Group Plc rose too, with any easing in central-bank rates likely to soothe concern around loan defaults.
“The inflation print is great news for the markets,” Liberum Capital Ltd. strategist Susana Cruz said in written coments. While the BOE is still likely to hike rates again on Thursday, “this brings cut expectations forward and reduces the downside for gross domestic product in 2024,” she said.
The FTSE 250 midcap index was up 1.3% as of 10 a.m. in London, while the exporter-heavy FTSE 100 rose 0.7%, outperforming European peers as the pound fell against the dollar.
UK shares have mostly underperformed this year as Britain’s economy has been weighed down by a cost-of-living crisis and the fallout from Brexit. That’s left the country’s stocks trading at an “extreme discount” to global shares, strategists at Berenberg said this month.
“As long as bond yields and inflation show signs of a relatively strong drop, cyclicals and growth stocks should outperform,” added Liberum’s Cruz. “But towards the turn of the calendar year, we expect this outperformance to fade along with economic activity.”
--With assistance from Greg Ritchie.
(Adds strategist comments from fourth paragraph.)
