London's FTSE 100 closed last week with a 0.22% gain on Friday, capping a 2.66% weekly advance that snapped a four-week losing streak. The rebound was driven by diminishing expectations for an imminent Bank of England rate hike, as traders reassessed the inflation outlook amid softening economic data.
Ruth Gregory, deputy chief UK economist at Capital Economics, noted that "the backdrop was much less conducive to a long-lasting bout of inflation than it was in 2022." This sentiment helped lift equity markets, even as the broader economic picture remained fragile.
UK retail sales volumes dropped 1.3% in April, according to the Office for National Statistics. Automotive fuel sales plunged 10.2% as higher prices deterred driving. Excluding fuel, retail sales still fell 0.4%. Meanwhile, S&P Global's flash UK composite PMI sank to 48.5 in May from 52.6 in April, slipping below the 50 contraction threshold. Chris Williamson, chief business economist at S&P Global Market Intelligence, described the "faltering economy and spiking price pressures" as a "major quandary" for the BoE.
The London Stock Exchange is closed on Monday for the Spring Bank Holiday, so Tuesday's session will absorb any weekend developments, particularly around oil and geopolitics. Reports suggest the U.S. and Iran are nearing a 60-day ceasefire-extension deal to reopen the Strait of Hormuz, but a breakdown could send oil prices higher, exacerbating UK inflation.
Political uncertainty also lingers. Reports indicate the UK proposed a single market for goods with the EU, which Brussels rejected. Prime Minister Keir Starmer's position is seen as shaky after weak local election results.
In M&A news, Bodycote shares surged 19% on Friday after the company received an all-cash 885p per share takeover offer from Apollo, valuing the thermal processor at approximately £1.52 billion. Bodycote joins a list of UK-listed firms, including Intertek and Tate & Lyle, that have attracted foreign bidder interest.
Company updates this week include Kingfisher's first-quarter results on Tuesday, Pets at Home and HICL Infrastructure full-year numbers on Wednesday, and updates from Johnson Matthey and SSE on Thursday. Aarin Chiekrie at Hargreaves Lansdown noted that SSE appears "relatively immune" to the Middle East conflict.
Traders will also watch for U.S. core PCE data on Thursday, the Fed's preferred inflation gauge. A stronger reading could push global bond yields higher, while a weaker number may reinforce expectations that central banks will hold rates steady.
Stephen Millard, deputy director at the National Institute of Economic and Social Research, called the recent inflation rise "a bad hit at a bad time," with oil prices up nearly 50% since the Iran war began. The FTSE 100's rate-relief rally faces a slim margin for error, as any negative oil news, weak retailer reports, or rising yields could quickly shift focus back to the UK's growth concerns.
