FTSE 100 soars most in 5 weeks after Bank of England stimulus

U.K. blue-chip stocks jumped on Thursday by the most in about five weeks, as the Bank of England (BOE) cut its key interest rate for the first time in seven years and ramped up its stimulus efforts in the aftermath of the Brexit vote.

The FTSE 100 surged 1.6% to finish at 6,740.16, its sharpest one-day percentage gain since July 30, FactSet data showed. Shares of only eight companies ended in the red.

Exporters rose Thursday as the pound dropped, a move that makes British products less expensive to buy for international customers. Also higher were shares of companies who take in the bulk of their revenue from overseas. Drugmakers AstraZeneca and GlaxoSmithKline PLC rose 2.7% and 1.6%, respectively. Coca-Cola HBC gained 2.2%.

The pound fell to $1.3129 from $1.3321 just after the BOE, led by Gov. Mark Carney, cut its key interest rate to a record low 0.25%. The bank is moving to aid the British economy, which has seen a slowdown since the U.K. voted to leave the European Union on June 23.

Risk taking?: The BOE also expanded its quantitative-easing program to £435 billion ($579 billion) and plans to start buying £10 billion in corporate bonds. A new Term Funding Scheme makes available about £100 billion in ultracheap, four-year loans to banks.

Most bank shares rose, leaving Standard Chartered PLC up by 5.2%. HSBC PLC ended up 2.6% and Royal Bank of Scotland Group PLC rose 0.7%. Lloyds Banking Group PLC shares however, ended 2% lower.

“The aggressiveness of the [BOE’s] move today is to try to get investors to take some risks,” said Julien Jarmoszko, a European equities analyst at S&P Global Market Intelligence.

However, “gilts are going up massively and yields are going down on the 10-year [bond],” he said, indicating investors were still seeking the relative safety of government debt. When bond prices rise, yields fall.

Driving to record lows, the 10-year gilt yield fell 16 basis points to 0.64%, according to Tradeweb.

Equities “are up, yes, but to me, we will continue to see an extension of the trend we’ve seen already—relatively defensive shares will continue to be priced up, sovereign bonds and investment grade bonds will continue to be priced up,” said Jarmoszko. “Therefore, we’re not breaking that circle of investors being cautious and investing in very low-risk securities.”

Inflation: But bonds may be “vulnerable as an investment going into next year if [inflation] forecasts are confirmed,” said Jarmoszko. The Bank of England foresees inflation rising much faster than it had previously expected, as the pound has dropped sharply after the Brexit vote. Consumer price inflation is forecast to reach 2.4% in two years.

“If inflation expectations were to rise, investors who’ve been hiding in…defensive assets will face heavy losses,” he said.

Movers: Shares of Barclays PLC rose 0.4%. The U.S. securities regulator, the Financial Industry Regulatory Authority, on Wednesday fined the lender $1.3 million for systematic reporting violations. Barclays neither admitted nor denied the charges, but consented to FINRA’s findings, the regulator said in a statement.

Hikma Pharmaceuticals PLC shares sank 17% as the drugmaker lowered its profit target for its generic drugs business.

Aviva PLC shares rose 6.7% as the insurer said it plans to raise its interim dividend by 9.9%. It also posted a 13% rise in half-year operating profit.

Randgold Resources PLC dropped 3.8% as the miner’s second-quarter net profit fell because of setbacks at its Ivory Coast and Kibali gold mines.

Source: MarketWatch