Stocks in London ended Monday in the green, as miners gained on rising commodity prices, and fears of a 100 basis point interest rate hike from the US Federal Reserve faded.
The Fed's policy-setting Federal Open Market Committee is due to meet July 26 to 27 to debate the next move in its war on inflation. Expectations of a sharper full percentage point hike had grown last week after figures showed the US annual inflation rate raced to 9.1% in June, from 8.6% in May.
However, markets now believe a 75 basis point hike from the US Federal Reserve is the most likely outcome.
Incidentally, a 100 bps hike would be the largest increase since the Fed started directly using overnight interest rates to conduct monetary policy in the early 1990s.
The FTSE 100 index closed up 64.23 points, or 0.9%, at 7,223.24. The FTSE 250 ended up 181.35 points, or 1.0%, at 19,015.15, and the AIM All-Share closed up 11.62 points, or 1.3%, at 885.97.
The Cboe UK 100 ended up 0.7% at 719.53, the Cboe UK 250 closed up 1.1% at 16,557.47, and the Cboe Small Companies ended up 0.6% at 13,165.83.
In European equities, the CAC 40 in Paris ended up 0.9%, while the DAX 40 in Frankfurt finished 0.7% higher.
‘Investors seem to be taking the view that the US Federal Reserve will not be overly aggressive with the pace of interest rate hikes, in the belief that the central bank would not want to risk plunging the country into economic turmoil,’ said AJ Bell's Danni Hewson.
In the FTSE 100, miners ended among the best performers as commodity prices rose on the back of a weaker dollar.
Antofagasta closed up 4.5%, Anglo American up 3.4%, Glencore up 3.2% and Rio Tinto up 2.9%.
At the other end of the large-caps, GSK ended the worst performer, down 19%, after the spin-off of the drugmaker's consumer health arm Haleon took effect.
Separating Haleon had a large impact on the value of GSK. The company could no longer count income or profit from the consumer health business as its own, nor its growth prospects. This meant GSK shares plunged on the day of the demerger.
As such, GSK will conduct a share consolidation in order to counter any drop. This will reduce the number of shares in issue to increase the price of each one and return them to the price before the demerger was completed.
The Haleon separation will take the form of a demerger of at least 80% of GSK's current 68% share of the consumer business to GSK shareholders. The remaining 32% of Consumer Healthcare is held by US drugmaker Pfizer, which will exit its 32% interest in Haleon after the float, though it cannot start doing this until November.
A consolidation of GSK shares will be implemented on Monday, after the market close. The ratio for the consolidation depends on ‘fluctuations in the volume and price of the GSK shares’ on Monday. Haleon shares also will trade in New York as American depository receipts.
Haleon provides consumer healthcare products in five categories: Oral Health, Pain Relief, VMS, Respiratory Health, Digestive Health and Other.
Haleon went straight into the FTSE 100 index, with its shares closing at 314.00p, giving it a market value of around £30 billion. GSK's market capitalisation stands at around £70 billion. As a result, the lowest ranked FTSE 100 stock based on closing prices on Monday will be demoted to the FTSE 250 to make room for Haleon, index provider FTSE Russell previously said.
In the FTSE 250, Euromoney closed up 9.5% after the business media and events firm accepted a takeover offer from a consortium of Luxembourg-based private equity firm Astorg Asset Management and London-based private equity firm Epiris.
Direct Line lost 13% after the insurer cautioned on ‘heightened volatility across the UK motor insurance market’, adding another warning from London-listed insurers.
‘We have seen claims inflation in motor in the first half of 2022 spike above the levels assumed in our pricing. As a result, we are revising our combined operating ratio target range for 2022 to 96% to 98%,’ Chief Executive Officer Penny James commented.
Direct Line had previously targeted a combined operating ratio range of 93% to 95%. A ratio below 100% indicates an insurer is making underwriting profit. A ratio of 98% would be only barely profitable.
Blue-chip rival Admiral shed 7.8% in a negative read-across.
The dollar was lower across the board. The pound was quoted at $1.1994 at the London equities close, up sharply from $1.1853 at the close Friday.
The euro stood at $1.0167 at the European equities close, sharply higher against $1.0074 late Friday. The single currency was moving off 20-year lows, having breached parity against the greenback last week as investors eye the European Central Bank's interest rate decision on Thursday.
Against the yen, the dollar was trading at JP¥138.17, down from JP¥138.56 late Friday.
Stocks in New York were higher at the London equities close as bank earnings season continued in earnest.
The DJIA was up 0.4%, the S&P 500 index up 0.6% and the Nasdaq Composite up 1.1%.
Dow member Goldman Sachs was up 2.5%. The New York City-based bank reported a fall in profit in the second quarter, as it took a chunky credit loss provision, but also saw revenue slump as its Investment Bank recorded a sharp fall in Underwriting income.
Bank of America shares were flat after the bank reported a sharp drop in profit in the second quarter, as the bank set aside credit provisions due to a ‘dampened’ economic outlook, but saw its largest unit record income growth.
Brent oil was quoted at $105.55 a barrel at the equities close, rising from $101.57 at the close Friday.
Gold stood at $1,709.33 an ounce at the London equities close, firm against $1,704.08 late Friday.
The economic events calendar on Tuesday has UK labour market data at 0700 BST and eurozone inflation readings at 1000 BST.
The UK corporate calendar on Tuesday has interim results from lender Arbuthnot Banking Group and photo booth operator Photo-Me International. There are also trading statements from construction firm Kier Group and international money transfer provider Wise.
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