Key Takeaways
- The FTSE 100 has reached a new record high, driven by mining stocks.
- HSBC and Rolls-Royce are the largest contributors to the Morningstar UK Index’s gains over a one-week period.
- Investors may not be factoring in the impact of Trump’s tariffs on the wider European equity market.
The FTSE 100 has hit the ground running at the start of Q3, with mining stocks posting the largest gains in morning trading, and taking the UK index of leading stocks to a fresh high.
On Jul. 10, the FTSE 100 index of leading stocks had risen by almost 90 points, or 1%, to a new peak of 8947.84 points by lunchtime, topping the previous record of 8908.82 set in March. Anglo American, Rio Tinto and Glencore all up between 3.7% and 4.7%, largely powered the surge in the index of blue-chip stocks.
Michael Field, chief equity strategist EMEA at Morningstar, believes that positive news flow is allowing investors to ride a wave of optimism, despite the backdrop of ongoing global economic uncertainty.
“We are moving into earnings season. Things are improving as interest rates are lowered, and inflation is low. So, it’s a question of what’s not to like at the moment,” he tells Morningstar UK.
Europe’s Stock Markets in Positive Mood
The Morningstar UK Index is up over 10% so far this year, while the FTSE 100 is more than 8% higher in the year to date. Stock markets in Europe were also in buoyant mood, with Germany’s Dax Index and Italy’s FTSE MIB opening the trading session at new highs. So which stocks and sectors are driving the rally across Europe?
Morningstar’s Field argues that the UK, Germany, and Italy are benefiting specifically from investor exuberance due to the makeup of their markets.
“The German economy is heavily exposed to industrials and so it has exposure to structural trends like renewable energy and data center growth. And then the UK has just signed a trade deal with the US. It may not be amazing but at least the country knows where it’s at,” he adds.
Field also points to the outperformance of Southern European economies driven mainly by Spain and Italy. However, he does believe the markets are not factoring in the full impact of tariffs.
“The markets are kind of ignoring tariffs completely which is the danger. But if indeed the tariff situation fades into the background, then the markets are going to be proven correct.”
According to Morningstar metrics, the financial services sector is the leading contributor to the outperformance of the Morningstar UK Index. The sector returned 1.97% from July 2 to July 9.
The Stocks Leading the Markets Higher
UK bank HSBC HSBA leads the pack with the largest contribution to the index. The stock returned 4.08% which amounts to a 0.28% contribution to the index’s gains.
HSBC has reported double digit returns so far this year. Its share price is up 16.11% trading at 909.60p, slightly under Morningstar’s fair value estimate for the stock at £10.
HSBC is holding firm, despite current headwinds as the bank undergoes restructuring plans, faces down trade shocks due to US-China frictions, and deals with the loss of revenue from falling interest rates.
Aerospace and defense giant Rolls-Royce RR. posted a return of 4.77% with a contribution of 0.16%. Rolls-Royce has become a standout UK equity success story. Its share price is up 66% so far this year caught up in the dramatic defense stock rally.
The company is expected to experience a boost in new government commitments to increase defense spending throughout Europe.
“The UK stock market continues to flex its muscles and show strength. Investors lapped up shares in the mining, oil and pharmaceutical sectors, showing a risk-on mood. Trump is throwing out numbers left, right and center, and investors have begun to dismiss anything that isn’t set in stone,” says Dan Coatsworth, investment analyst at AJ Bell.
Renewed Optimism Over Trade Deals
European markets are being lifted by renewed optimism that an EU-US trade deal will be reached before President Donald Trump’s Aug. 1 deadline.
Meanwhile minutes from the Federal Reserve’s Federal Open Market Committee suggests that members are looking to potentially cut rates this year.
In euro terms the Morningstar Germany Index is up over 22% so far this year, while the Morningstar Italy Index has seen a 24% increase.
“European shares are largely holding onto yesterday’s gains, which saw Germany’s DAX reach a record high, with several other European indexes closing at levels not seen since just before the Great Financial Crisis,” says Derren Nathan, head of equity research at Hargreaves Lansdown.
“It’s too early to call the end of US exceptionalism, but there are signs that investors are looking to diversify.
“Europe offers some big names in everything from fashion to pharmaceuticals and there’s still some value to be had,” he says.
