Rolls-Royce among UK stocks benefiting from big US rate cut

An outsized interest rate cut of the type more often seen in an economic crisis boosted markets today as miners joined Rolls-Royce Holdings (LSE:RR.) and Burberry Group (LSE:BRBY) at the top of the FTSE 100 index.

Even though the US economy has near full employment, steady consumption and rising real wages, the Federal Reserve opted to make an emphatic start to the rate cutting cycle.

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It is a latecomer to the party after the Bank of England acted in early August before today’s no change decision, while the European Central Bank has lowered on two occasions.

After more than a year with rates at a 23-year high, the 50 basis-point move by the Federal Reserve to 4.75-5% was accompanied by some careful messaging as chair Jerome Powell said the motivation was to protect growth rather than fear of an imminent recession.

Two quarter-point cuts are forecast this year but Powell stressed there’s no rush, a line that meant the US dollar index held firm in the hours after the announcement.

The Fed’s projections that the US jobless rate will end this year at 4.4%, still low by historical standards but up from its June forecast of 4%, supported Powell’s view that the Federal Reserve does not see an elevated risk of recession.

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That’s potentially significant for stock markets given that equities have tended to do well in periods when the Federal Reserve has cut rates while the US economy is not in recession.

UBS points out that US equities have historically risen by 18% in the next six months although this statistic is tempered by markets having recently 'front run' the soft-landing scenario.

In those first six months after the first cut, UBS reports a defensive bias with household products, pharmaceuticals, software and utilities outperforming. Rate cuts have also been good for consumer durables and autos.

The Swiss bank’s base case remains for the S&P 500 to reach 5,900 by year-end and 6,200 by June 2025, which compares with last night’s close of 5,618.

Futures trading pointed to the benchmark opening 1.6% higher this afternoon after improved risk appetite had earlier swept through stock markets in Asia and Europe.

Glencore (LSE:GLEN) and Anglo American (LSE:AAL) were among the big risers as FTSE 100 investors eyed support for commodity prices from improved demand and the outlook for a weaker dollar.

The potential boost for US growth stocks following a long period when high rates have diminished the value of their future cash flows, helped tech investors Pershing Square Holdings Ord GBP (LSE:PSH) and Scottish Mortgage Ord (LSE:SMT) Investment Trust in London’s top flight.

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Sunbelt plant hire business Ashtead Group (LSE:AHT), which generates most of its revenues in North America, got a lift on hopes that lower corporate borrowing costs will stimulate demand.

Cyclical plays such as thermal energy firm Spirax Group (LSE:SPX) were also in favour in London, while there was relief for stocks with exposure to emerging markets. This included Asia-facing Burberry, which topped the risers board in its penultimate session in the FTSE 100.

Lower rates and a weaker dollar tend to be bullish for emerging markets, given the impact on $5 trillion of dollar denominated debt. A stronger local currency in turn leads to lower rates, providing a potential boost to demand.

Prudential (LSE:PRU) and drinks group Diageo (LSE:DGE) also fared well, while the improved risk appetite and lower debt costs underpinned a strong session for Rolls-Royce as the engine maker moved deeper into record territory at 511p.