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FTSE rallies as ECB settles nerves after hawkish Fed

UK stock market performs about-turn as investors recover from last night’s hawkish statement from US Federal Reserve to focus on European Central Bank's efforts to stabilise eurozone.

FTSE rallies as ECB settles nerves after hawkish Fed

The UK stock market performed an about-turn this afternoon as investors shook off their nerves from last night’s hawkish statement from the US Federal Reserve and welcomed the policy statement from the European Central Bank.

Having dropped 53 points or 0.7% to 7,650 as investors responded cautiously to the 0.25% rise in the Fed’s funds rate range to 1.75%-2%, the blue-chip index reversed course and rallied 42 points or 0.6% to 7,746.

ECB president Mario Draghi called time on the central bank's huge €2.5 billion (£2.2 billion) quantitative easing stimulus programme of the past three years but said interest rates would remain at their rock-bottom low for a year, reassuring markets that its ultra-loose monetary policy would not stop overnight.

Although the Fed upped its US economic forecasts amid low unemployment and data pointing to strong second quarter growth of nearly 4%, David Kelly, chief global strategist at JP Morgan Asset Management, played down the prospect that the central bank would raise rates too aggressively.

‘Overall, the Fed is getting more hawkish, reflecting an economy that is humming along strongly. This should feed through to further increases in long-term interest rates over the next year.

‘However, by the second half of 2019 the cumulative impacts of monetary tightening along with fading fiscal stimulus should slow the economy. This may well cause the Fed to pause in what has been recently a slow but relentless pace of monetary tightening,’ he said.

In London a range of utility, mining, consumer and financial stocks weighed on the FTSE with water company Severn Trent (SVT) the biggest faller, down over 4% to £18.49.

Rolls Royce (RR) (pictured) provided some upward momentum for the index, rising 4.8% to 868p after confimring 4,600 job cuts, more than 8% of its UK workforce. The aerospace engineer hopes the £500 million restructuring will save £400 million a year by the end of 2020.

Artjom Hatsaturjants of Accendo Markets said the cuts were being made in the corporate and support jobs not in core engineering roles.

‘The company was quick to respond to market pressure to improve its financial stability after European Aviation Safety Agency highlighted reliability issues with its Trent 1000 engines. Improving in-service maintenance for engines that power the Boeing 787 Dreamliner will mean extra expenses and investors were welcoming the news that Rolls-Royce was keeping firmly on top of the issue.’

Aveva (AVV) light up a buoyant FTSE 250, up 17 points to 4,265 after an 83 point drop earlier. Shares in the engineering software company shot up 12% or 310p to £28.42 after reporting a 6.8% rise in pro forma annual profits after its merger with Schneider Electric.

‘It will be possible to make a more informed judgement on the wisdom of the Schneider tie-up in 12 months when the integration process will be more advanced. The company is targeting annual cost synergies of £25 million by the end of the 2020 financial year,’ said Russ Mould of AJ Bell.

On currency markets the pound reversed gains, falling 0.37% to to $1.3424 against the dollar.

The early advance was in response to strong retail sales figures, which rose 1.3% in May boosted by the royal wedding. This revived expectations that the Bank of England could raise interest rates this summer to keep inflation in check.

‘It’s welcome good news for the UK economy following some recent disappointments, notably from the manufacturing sector. But despite today’s positive report from the ONS, news from individual companies continues to paint a somewhat gloomy picture for the UK’s bricks-and-mortar retailers,’ cautioned Ben Brettell, senior economist at Hargreaves Lansdown.

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