U.K. stocks moved higher Friday, extending a run of weekly wins, as the pound slid to a seven-week low after disappointing data on British economic growth.
In the first quarter, the U.K. logged its slowest rate of economic growth since 2012, official figures showed, widely undershooting analysts’ forecasts and significantly lowering expectations of a Bank of England rate rise next month.
On the corporate side, shares of Royal Bank of Scotland PLC struggled in the wake of the lender’s release of its quarterly earnings report.
How markets are moving
The FTSE 100 index /zigman2/quotes/210598409/delayed UK:UKX -0.44% rose 1.1% to close at 7,502.21, bagging a 1.8% gain for the week. That marked benchmark’s fifth straight weekly rise.
The pound /zigman2/quotes/210561263/realtime/sampled GBPUSD +0.0772% fell to $1.3785, down from $1.3915 late Thursday in New York and trading around its lowest level since March 9. Against the euro, sterling /zigman2/quotes/210561278/realtime/sampled GBPEUR +0.0502% was at €1.1388, compared with €1.1502 earlier in the session and €1.1497 late Thursday.
The yield on the 10-year gilt /zigman2/quotes/211347177/realtime BX:TMBMKGB-10Y 0.00% fell 6 basis points to 1.448%, according to Tradeweb, as prices rose. The yield had moved around two-month highs this week.
Economic growth surprise
The U.K. economy grew at its slowest pace in more than five years in the first quarter of 2018, dampening the case for an interest-rate increase from the Bank of England when it next meets in May.
The Office for National Statistics said Friday that gross domestic product in the U.K. expanded by 0.1% in the first quarter, the slowest rate of growth since the fourth quarter of 2012. Economists had expected a reading of 0.3% in the preliminary report. It was a visible slowdown from the fourth quarter of 2017, when GDP grew 0.4%.
A drop of 3.3% in construction was the largest downward pull in the quarter, as the sector was hit by the “Beast from the East” wintry weather. “Snow had some impact on GDP in Q1, particularly in construction and some areas of retail, but bad weather had limited effect overall and gave some boost to energy supply and online sales,” the ONS said.
What’s driving the market
The gain for U.K. stocks was helped by a faltering pound, driven even lower after the disappointing reading on the health of the British economy. The FTSE 100 tends to rise when the sterling falls, as multinational companies on the index generate the bulk of their earnings and revenue overseas.
Investors world-wide were also watching a thaw in tensions between North and South Korea. North Korea’s leader Kim Jong Un crossed the military demarcation line to meet South Korea’s President Moon Jae-in, reportedly discussed denuclearizing the Korean Peninsula during a historic meeting on Friday.
What are strategists saying?
“You could blame today’s GDP figures on the cold snap but the outcome is a fact and it matches the weak indicators in Q1 2018. To us it was the final nail in the coffin for our call on the BOE ahead of the May meeting,” said Richard Falkenhäll, senior FX strategist at SEB, in a note.
“To us this weak start to the year and the fact that inflation will continue to fall going forward and end the year below the 2% target, makes us change our forecast on the Band of England (BoE). We now expect unchanged policy in May. In fact a rate increase seems unlikely before 2019,” he added.
RBS /zigman2/quotes/209265718/delayed UK:RBS -1.73% /zigman2/quotes/203233010/composite RBS -1.31% fell 1.5%, even as the U.K.- majority owned lender posted a threefold rise in first-quarter net profit to £792 million.
Among multinationals, consumer product company Reckitt Benckiser Group PLC /zigman2/quotes/205841729/delayed RBGLY -1.14% rose 1.9%, British American Tobacco PLC /zigman2/quotes/209116881/delayed UK:BATS +0.27% /zigman2/quotes/210207837/composite BTI +0.81% added 1.6% and liquor maker Diageo PLC /zigman2/quotes/205611832/delayed UK:DGE -0.75% /zigman2/quotes/208129584/composite DEO -0.02% rose 2.2%.