Interactive Investor

UK bank and oil shares drive FTSE 100 to pandemic high

5th January 2022 15:46

Graeme Evans from interactive investor

A stock market rally that began early December continued today, giving UK investors plenty to cheer. These are the session's big winners.

Lloyds Banking Group (LSE:LLOY) shares established a foothold above 50p today as the City's focus returned to inflation and the outlook for higher interest rates in 2022.

The 1.25p improvement to 51.2p set the pace in a resurgent UK banking sector as the FTSE 100 index consolidated yesterday's 1.6% new year rally by adding another 0.2% to 7,520.

Other widely held stocks boosting the value of interactive investor portfolios included BP (LSE:BP.) and Royal Dutch Shell (LSE:RDSB) after they benefited from a five-week high for the Brent crude price.

This afternoon's level of $80.80 a barrel came a day after Opec and its allies confirmed plans to raise crude production by a further 400,000 barrels a day in February, in line with their existing schedule as global demand recovers following Covid-19.

But with several oil producing countries struggling to increase their output, analysts at UBS think the effective increase might be considerably less than the 400,000 barrels quoted.

This ebbing of Opec spare capacity and record levels of demand mean UBS expects Brent to trade in a range of $80-$90 this year. BP shares rose 5.25p to 356.25p at their highest level since early November while Shell added 26.2p to 1726.4p.

The continued oil price strength contributed to the return of inflation as the main focus for City traders after yesterday's relief rally, when airlines and other re-opening stocks were sharply higher on diminishing fears about the economic impact of the Omicron variant.

Investors rotated out of high growth sectors towards more cyclical stocks on expectations that policymakers in the US and the UK will need to accelerate the pace of interest rate rises at a time when inflation is running hot at 6.8% and 5.1% respectively.

Such moves will bring much needed relief for the margins of Britain's biggest lenders after a prolonged squeeze due to ultra-low borrowing costs. The Bank of England hiked rates to 0.25% in December and may act again as soon as at its next policy meeting in February.

Lloyds shares have now recouped their Omicron losses and are level with their post-pandemic high seen in early November. NatWest (LSE:NWG), which is regarded as the most rate sensitive of the UK banks, lifted 2.9p to 237.8p and Barclays (LSE:BARC) added 2.18p to 198.84p.

The sector's fourth quarter and full-year reporting season is now just over a month away, with analysts hopeful that a combination of improving economic conditions, rising interest rates and strong capital positions will lead to some significant shareholder returns.Today's investor appetite towards UK lenders was noticeably stronger than for HSBC (LSE:HSBA) and Standard Chartered (LSE:STAN), with both Asia-focused stocks trading lower.

Other top flight fallers included tech-focused Scottish Mortgage (LSE:SMT) Investment Trust as last night's second consecutive big rise in US bond yields put pressure on the value of many of its Wall Street holdings.

The FANG+ index, which includes Meta (NASDAQ:FB) (Facebook), Apple (NASDAQ:AAPL) and Netflix (NASDAQ:NFLX), fell 1.7% to reflect the impact of bond yields on the appeal of high-growth companies built around future cash flows.

Today's session also saw British Airways owner International Consolidated Airlines Group (LSE:IAG) and engines giant Rolls-Royce (LSE:RR.) consolidate gains achieved in yesterday's strong session. InterContinental Hotels (LSE:IHG) also added another 2% or 122p to 5150p after UBS upgraded its price target to 5,575p.

The bank lifted its 2022-23 earnings forecasts by 4-5% and said it was taking a more optimistic view on recovery prospect due to InterContinental having the strongest pricing power in the current inflationary environment.

UBS said: “A 12% discount to comparable peers should begin to unwind as earnings momentum remains strong and net unit growth improves.”

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