UK stocks rally after new year’s break

The UK’s FTSE 100 led European equities higher on Tuesday after survey data indicated China’s vast manufacturing industry had not been significantly derailed by the Omicron coronavirus variant.

The blue-chip UK share index rose 1.3 per cent in morning dealings as energy and banking stocks that respond well to signs of robust global growth outperformed. Shares in British Airways owner IAG also jumped 10 per cent after a leading epidemiologist said in an interview with BBC Radio 4’s Today programme that Omicron cases in adults may have plateaued in London.

London’s markets were closed for a bank holiday on Monday, meaning UK equities were also catching up after missing out on sizeable gains in Europe that day.

Europe’s regional Stoxx 600 equity gauge added a further 0.6 per cent on Tuesday, building on a record high set in the previous trading session.

A purchasing managers’ index for China’s manufacturing sector, produced by Caixin and Markit, rose to a higher than expected reading of 50.9 for December. This drove the index, which collates executives’ responses to questions on topics such as hiring plans and new orders and shows expansion when it rises above 50, to its highest level since June.

The growth, said Caixin Insight Group senior economist Wang Zhe, indicated that “the impact of scattered Covid-19 flare-ups was under control”. Investors had been concerned about coronavirus lockdowns in China squeezing global supply chains and pushing inflation higher.

On Wall Street, futures markets indicated the S&P 500 share index would open 0.2 per cent higher after closing at a record high on Monday, pulled up by gains for Apple and electric carmaker Tesla.

Apple’s market capitalisation rose to $3tn on Monday, making it the first company ever to achieve this valuation and highlighting analysts’ concerns that the performance of the S&P has become overly reliant on a small group of large tech companies that have been boosted by the pandemic.

“The US economy looks to be deep into its business cycle, which typically sees market leadership narrow to mega-cap stocks,” said Gavekal analyst Tan Kai Xian, arguing that rising US wages would exacerbate this trend.

“At such moments, firms operating on thin margins are hurt most, and may turn lossmaking. In contrast, fatter-margin firms can keep growing,” he said.

“If the crutch of big tech was kicked away, then watch out,” added Patrick Spencer, vice-chair of equities at RW Baird. “The worry is that one of these very big tech stocks declines and that starts a waterfall of selling.”

In debt markets, US Treasury prices were steady following sharp falls on Monday as traders backed out of the assets, which are sensitive to expectations of higher interest rates and inflation.

The yield on the benchmark 10-year note, which moves inversely to its price, was flat at 1.637 per cent after rising more than 0.13 percentage points in the previous session. Germany’s equivalent Bund yield, which determines borrowing costs in the eurozone, was steady at minus 0.127 per cent.

In Asia, Tokyo’s Nikkei 225 closed 1.8 per cent higher while Hong Kong’s Hang Seng index was flat.

Brent crude, the oil benchmark, rose 0.3 per cent to $79.26 a barrel ahead of a meeting among members of the Opec+ producer group.

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