FTSE 100 heavyweights surge as mood improves

Hopeful signs on the Ukraine border and positive developments for AstraZeneca and Ocado shares have lifted the FTSE 100 today, says our City analyst.

Russia's withdrawal of some troops from near Ukraine's border helped turn down the dial on geopolitical risk today as an uneasy calm settled over European markets.

The FTSE 100 index rebounded 0.7% after Monday's heavy losses, when investors dumped airline, travel and other riskier assets due to the prospect of full-scale conflict in Ukraine.

Today's improved mood, which followed reports that some Russian troops have returned to their bases, enabled a fall in Brent crude from a seven-year high at near $97 a barrel.

Brent prices have risen by more than 20% this year, with geopolitical tensions one of several factors behind the spike. Europe gets nearly 40% of its natural gas and 30% of its oil from Russia, highlighting the potential for severe economic disruption in the event of war and any subsequent sanctions against Russia's economy.

Saxo Markets trader Mike Owens noted a fall in the price of many of the commodities with a reliance on Russian supply, as the moves seen over the weekend start to reverse.

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He added: “Palladium, where Russia’s exports are responsible for 45% of global production, have fallen by 3.5% and wheat by 2%. It should be noted that prices remain at elevated levels, and most are still higher than where they were last week.”

While the position on geopolitical risk has shown tentative signs of improvement, there was no respite from interest rate risks today as US bond yields quickly resumed their upward momentum after stalling in the face of yesterday's uncertainty.

The key US 10-year yield jumped back above 2%, reflecting signs that the Federal Reserve may need to hike interest rates by 0.5% next month in order to deal with inflation pressures.

This renewed focus on higher interest rates helped stocks in London's financial sector to recover lost ground, with Lloyds Banking (LSE:LLOY) up 0.7p to 52.4p after falling 4% yesterday. NatWest (LSE:NWG) also improved 3.1p to 245.7p as attention turns to the start of the earnings season on Thursday.

The risers board was led by GKN owner Melrose Industries (LSE:MRO) after its shares improved 5%, while there was a jump of 4% for AstraZeneca (LSE:AZN) after it reported encouraging results on a phase three trial for prostate cancer drug Lynparza.

Shares rose to 8,721p, but Bank of America today highlighted a target price of 10,300p based on forecasts for Lynparza to deliver a bigger-than-expected $7 billion of sales in 2025 amid a busy pipeline of other future multi-billion opportunities.

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The bank's analysts also swung behind the longer-term prospects for grocery warehouse technology business Ocado (LSE:OCDO), whose shares jumped 4% or 48.5p to 1,349p today.

Bank of America believes the shares have the potential to be 3,370p, noting that existing partnerships and the company's development pipeline support a minimum valuation of 1,700p a share.

The bank said: “Ocado's partners, including Marks & Spencer, are already committed to £22 billion sales capacity or at least 56 Customers Fulfilment Centres by 2035. The total addressable market in grocery is still massive and growing opportunities arise owing to the new technologies developed in unexplored non-food territories.

“At the current share price, Ocado is not reflecting any potential new partnerships although we believe it is 'just' a question of time before more materialise.”