UKX FTSE 100 Index

By Sara Sjolin, MarketWatch

Marks & Spencer decline after confirmation of store closures

U.K. stocks scored a second record close in a row on Tuesday as traders welcomed signs that tensions between the U.S. and China are easing, lowering the risk of a full-blown trade war.

The pound swung between small gains and losses after several Bank of England members -- including Gov. Mark Carney -- appeared at a hearing on inflation and monetary policy before lawmakers.

What are markets doing?

The U.K.'s FTSE 100 index gained 0.2% to end at 7,877.45, logging a record close. The London benchmark on Monday had also ended at an all-time high after taking out its previous closing high of 7,787.97, hit last Thursday.

The pound rose to $1.3440, from $1.3426 late Monday in New York. Sterling hit an intraday high of 1.3492 after the BOE hearing.

What is driving the markets?

Optimism that the U.S. and China are backing away from a full-blown trade war lifted the investor mood on Tuesday. Beijing said it'll lower the import tax on cars to 15% from 25%, seen as a positive sign given the harsh trade rhetoric between the world's two largest economies recently. Additionally, the U.S. and China are also reportedly nearing a deal to settle a controversy (http://www.marketwatch.com/story/us-china-near-deal-that-would-ease-off-zte-ban-2018-05-21) over Chinese telecom group ZTE Corp.

Markets also rallied on Monday after U.S. Treasury Secretary Steven Mnuchin said on Sunday that the U.S. administration would put the trade war with China "on hold" while the two countries work on a deal to reduce the U.S.'s trade deficit with the Chinese.

Traders in the U.K. also kept a close eye on the government infighting over Brexit.

The cabinet remains divided over whether the U.K. should remain in something similar to a customs union with the European Union to avoid a "hard" border in Ireland. The bitter row has spurred some Conservative MPs to reportedly push for an out-of-cycle election in the U.K. to break the negotiation deadlock and potentially oust Prime Minister Theresa May

However, Foreign Secretary Boris Johnson late Monday spoke out against holding a "snap" general election and said he stands by May. Johnson has been very vocal in his opposition to a customs union, whereas May has indicated her willingness to compromise to avoid a hard border in Ireland.

What was on Tuesday's agenda?

Speaking at a Treasury Select Committee hearing, BOE boss Mark Carney said U.K. households are GBP900 worse off because of Brexit. He explained that the British economy has expanded slower than expected since the EU referendum in June 2016, impacting families across the country.

In relation to monetary policy, Carney defended his stance from the quarterly inflation report that rates won't rise until the U.K. economy is stronger.

Taking on a slightly more hawkish view, policy maker Gertjan Vlieghe said rates could rise as much six times in the next three years based on his forecast for inflation and economic growth.

What are strategists saying?

"The fact cable's gains more than halved as the day went on freed the U.K. index up to shake off its early reticence, the FTSE adding around 25 points in value. That sent it above 7,890 for the first time in its history, in the process making the mythic 8,000 mark closer to becoming a reality," said Connor Campbell, financial analyst at Spreadex, in a note.

"Whether or not the FTSE can actually reach that landmark level this week may be down to a couple of factors," he added, pointing to oil prices and sterling moves as the overriding factors.

Stock movers

Fresnillo PLC (FRES.LN) jumped 3.6% as metals prices rallied.

Shares of National Grid PLC (NG.LN) fell 0.2% after the U.K. energy regulator Ofgem said it has opened an investigation (http://www.marketwatch.com/story/ofgem-to-probe-national-grid-unit-over-forecasts-2018-05-22) into the company's forecasting on the electricity market.

Marks & Spencer Group PLC (MKS.LN) (MKS.LN) lost 2.9% after the retailer said it'll close a further 14 clothing and homes stores in the U.K.

Outside the FTSE 100, Halfords Group PLC (HFD.LN) slumped 12% after the retailer of motoring and cycling products said fiscal 2018 pretax profit declined 6% (http://www.marketwatch.com/story/halfords-2018-profit-falls-on-weak-pound-2018-05-22) due to currency headwinds.

(END) Dow Jones Newswires

May 22, 2018 12:38 ET (16:38 GMT)

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