Banks lead FTSE higher ahead of forecast rate cut

THE FTSE 100 ended higher in thin trade yesterday as heavily weighted bank shares rose on hopes of monetary easing in Europe, although it pared gains after weaker-than-expected US data.

The FTSE 100 closed up 21.17 points, or 0.3 per cent, at 6,451.29 points, rising on the first day of the month for the 10th straight time. Trading was quiet as most European bourses were shut for a public holiday.

Expectations of action to boost growth, in particular an anticipated European Central Bank (ECB) interest rate cut, has helped the FTSE rise more than three per cent from mid-April lows.

The banking sector, a major beneficiary of cheaper borrowing, rose 0.7 per cent, adding the most points to the index and taking sector gains since April 18 to 6.3 per cent.

“There certainly seems to be a 25 basis point cut (from the ECB) priced in now, so if that didn’t happen, I’d be very surprised if we didn’t see a correction in the market,” James Butterfill, global equity strategist at Coutts, said.

Before the ECB’s decision today, markets will also be digesting the latest monetary policy meeting of the US Federal Reserve. The Fed is expected to keep rates on hold.

“Whether it’s inflows, technicals or self-fulfilling, today it’s up ahead of the Fed and ECB decisions,” said Nick Xanders, head of European equity strategy at BTIG, adding that an ECB rate cut was now fully priced in.

“If they come out with some special tool, we could keep going up, but if they just cut by 25 basis points, we could ease off these levels, and if they do nothing, we’re down three to four per cent over the next week or two.”

Top individual gainer was BT, up 3.4 per cent, with traders citing hikes to the stock’s target price from Oriel and Nomura to 330p and 360p respectively. BT closed at 285p.

The index pared gains and briefly turned negative after several U.S. data reports missed expectations, weighing on growth-sensitive stocks.

US companies hired the least employees in seven months in April while manufacturing growth slowed, data showed.

“The US has disappointed, and Wall Street is down a bit so we’re coming off on the back of that,” Zeg Choudhry, head of trading at Northland Capital Partners, said.

Commodity-related stocks, which had been among the morning’s top gainers, took two points off the index by the close, having recovered from intraday lows.

Also on the downside, the FTSE’s top fallers all traded without entitlement to their latest dividend payout: Admiral Group, Barclays, Croda, ITV, Reed Elsevier, and Weir Group shaved 2.91 points off the index.