Banks lead the FTSE 100 higher on Basel III speculation

UK banks were the standout gainers in trading on the FTSE 100, helping to push the UK Index higher by near 0.8% on Friday.

An upgrade on the banking sector by US firm Citigroup, who upgraded their recommendation on the sector to ‘overweight’, whilst Societe Generale also issued a positive note on the sector has benefitted near term banking sentiment. This, along with speculation that banks may have found a loophole with the Basel III rules on capital requirements, is the key drivers behind today’s gains in UK banks.

The UK banking sector had earlier in the week traded near the bottom edge of a trading range that has kept prices within a 20% corrider for much of the last two years. Here the sector appears to have found support and so there is also a degree of technical price action helping to drive the sector higher today also.

A rally in the prices of metals has also had a beneficial impact on resource stocks today, with the miners and oil firms all tracking commodity prices higher.

With all three heavyweight sectors higher; the banks, oil and miners, it effectively locks in a positive day for the FTSE 100, which looks set to finish the week on a high. Though with economic data due out of the US this afternoon in the shape of consumer sentiment, personal income and spending and pending home sales index, there could be a degree of volatility in the afternoon after US GDP data really disappointed yesterday.

UK consumer confidence jumps
UK consumer confidence surprisingly jumped by the most in 18 years in May as consumer morale picked up. However, it could be quite dangerous to take these figures as a broader sign of high street confidence in the UK given the headwinds facing the UK’s retailers. There is every chance that these figures were artificially influenced by the warm spring weather and the consecutive bank holidays which served to lift spirits. As data has shown from retailers in the reporting season, outlooks remain rather volatile and clouded given the public spending cuts, rising inflation and lack of correlated earnings growth.