By Kathleen Brooks, research director at XTB
· Rio/ Glencore talks spur hopes of a recovery in the mining sector.
· UK stocks make a comeback, as BOE rate cut bets soar.
· The dinosaurs are back in fashion.
The FTSE 100 hit an intraday record high on Friday, and the index is on track to have a 2.5% rally this week, outperforming the Nasdaq, the S&P 500, and the Dow Jones at this stage. All sectors are higher on the FTSE 100 today, but the leader of the rally is the materials sector, and the top individual stock performers include oil companies, and Glencore. M&A news is spurring interest in the FTSE 100 at the end of this week, as Rio Tinto and Glencore were reported to be exploring a merger at the end of 2024.
This is not the first time a merger has been discussed between these two, back in 2014 they held unsuccessful talks. Neither side has enough cash to make a clean offer for the other, so instead a cash and share deal could be on the cards, which may not be as attractive for some shareholders. It is unclear how the deal would proceed, both are large, complex, sprawling companies. Glencore’s copper assets are no doubt attractive for Rio, however, both also have pockets of worrisome assets, including Glencore’s large investments in coal, something that Rio has excited in recent years. Looking back to early 2024, the BHP and Anglo deal didn’t seer the light of day, so it will be interesting to see what happens with Rio and Glencore. Glencore is a big part of the FTSE 100, and it would be a major loss if a merger took the company out of the UK index. Thus, there could be significant external pressure on any potential deal. Glencore has a valuation discount to Rio, of about $50bn, so it is likely that Glencore may be the junior partner in any potential deal.
Can Rio/ Glencore deal revitalise the mining sector?
We would note that the talks are not currently active, but it does suggest that M&A could be a theme of 2025. The weakness in the pound could also make UK companies takeover targets as we move through this year. As mentioned, a Rio/ Glencore merger would face major hurdles, however, if Rio were to take over Glencore, it could give Glencore’s major shareholders an attractive exit route from the company. As you can see below, most of the world’s largest miners have underperformed the overall indices, including the FTSE 100 and the S&P 500. Anglo American, another British-listed miner, is an outlier as it has outperformed the major indices in recent months. It is worth noting that it was part of a takeover deal with BHP last year, although that ultimately failed. However, the deal spurred a strategic change of direction at Anglo, which has been valuable for shareholders. Thus, there is pressure on the industry to take action to boost share prices.
Chart 1: Globally listed miners, the FTSE 100, and the S&P 500, all normalized to show how they move together.
Source: XTB and Bloomberg
The UK is in focus today, as retail sales disappointed, which has added to evidence that the UK economy is still suffering from a major lack of confidence, which has seeped into consumer activity. Although the big UK retailers like Next and M&S had a bumper Christmas season, the rest of the high street is struggling. Rate cuts from the Bank of England may help the consumer in the coming months, but the Chancellor may also need to consider action to boost sentiment at her Spring statement.
UK stocks soar as BOE rate cut bets increase
However, bad news on sales has not stopped the FTSE 250 from having a stunning week. The index is on track to rise more than 4%, as rate cut hopes spur a major recovery rally in UK mid cap stocks. The market is now predicting a 91% chance of a rate cut from the BOE next month, there was only a 73% chance at the start of the week. The interest rate futures market is also on the way to pricing in nearly 3 rate cuts from the BOE this year, earlier this week there had been less than two cuts priced in. As we mentioned, the market appears to be moving closer to the BOE’s expectation of four rate cuts in 2025.
The dinosaurs make a comeback
Another interesting dynamic may also boost the FTSE 100. Although the oil majors reported weak earnings for Q4, and BP is cutting jobs, the energy sector globally, is leading stock markets higher. The US energy sector is the top performer on the S&P 500 so far this year, followed by metals and utilities. Tech is a laggard as we move through January. This is good news for the FTSE 100, as the dinosaur stocks make a comeback. A 9% rise in the price of crude oil so far this year is leading the energy sector higher, but there have also been decent gains for Nat gas, heating oil and metals so far in 2025, as commodity prices race higher.
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