UK markets pushed higher on Tuesday, locking in some modest gains after a mid-session pullback. The FTSE 100 index added 35 points, or 0.7%, to close at 5,391. The FTSE 250 index had stronger performance throughout the day, rising by 143 points, or 1.4%, to close at 10,658.
Initial positive market sentiment was inspired by market gains in Asia, following Chinese stimulus hopes, explained Fiona Cincotta, a market analyst at City Index. However, the markets sank lower by mid-day, only to be lifted again by speculation that the European Central Bank (ECB) could detail plans on a bank recapitalisation, she said.
“The mining sector is almost solely responsible for leading the FTSE higher on optimism and speculation that more stimulus measures could be implemented to further fuel Chinese growth,” said Cincotta.
Miners often rally based on news of good economic prospects for China because the Chinese economy consumes huge amounts of raw materials when it is growing. This directly benefits miners, and many of these miners are traded in London.
“With mining stocks bearing a heavyweight influence on the FTSE 100, optimism for Chinese growth is likely to correlate with a beneficial performance on the FTSE 100 index,” said Cincotta. “The FTSE 100’s prospects are weighted to a degree on China’s ability to kick start slowing growth.”
Shares in the major miners Kazakhmys (KAZ) and Rio Tinto (RIO) both jumped, rising by 2.9% and 2.3%, respectively.
Meanwhile, shares in Wolseley (WOS) sank lower after the company reported a sharp drop in European sales, but still showed strength in its North American division.
“On balance, the strength of the US/Canada remains sufficient to overturn weakness elsewhere, resulting in an overall increase in like-for-like sales … That said, the [third-quarter earnings] statement reveals that there has been an adverse effect on profits from the weakness of the euro against sterling …. The near term forecast risks appear to be on the downside and we retain our cautious stance,” said Shore Capital analysts Jon Bell and Gavin Jago.
On the FTSE 250, Greggs (GRG) was the main gainer, with shares rising by just over 8%. Shares in the bakery retailer jumped after the UK government decided to amend its new VAT rules, ensuring that the company’s ever-popular pasties will not be subject to a previously-planned 20% tax hike.
“Greggs’ key savoury range, which accounts for 30-35% of its sales, now looks like it will not be subject to a 20% hike in prices from the autumn,” said Shore Capital analysts Clive Black and Darren Shirley. “The change of heart by Government comes as a considerable relief to all of the stakeholders in Greggs,” including customers management and shareholders.
The Shore Capital analysts specifically point out in a research report that Greggs campaign to eliminate the proposed new tax has done a world of good for the baker’s public image:
“We have to congratulate Greggs’ management and in particular its CEO, Ken McMeikan, for the way that he has gone about challenging the surprise Budget proposals. He has rallied his troops in an effective manner and shown a real resonance with his customer base. More importantly though he engaged constructively with Government and sought to improve Treasury proposals that were frankly not thought through. A bi-product, therefore, from the whole Whitehall farce has been that Greggs’ national profile has been markedly enhanced, an enhancement that would cost a small fortune in marketing terms, from which the group’s ongoing national expansion should benefit; Greggs’ may not have been so well known in the southern and western reaches of England in February but it is now.”
