UK Stocks Rebound Led by Banks as Bond Yields Fall and Pound Rises

London | EcoPulse24

UK markets ended Wednesday's session higher after two days of sharp losses, buoyed by a rebound in banking and defense stocks. Investors closely monitored developments in the Middle East conflict and its potential impact on UK inflation and monetary policy.

The FTSE 100 index rose by more than 0.5%, clawing back some recent losses as investor sentiment improved despite ongoing geopolitical uncertainty.

Banks and Defense Lead the Recovery

The banking sector led the gains, with HSBC up around 2%, Barclays rising 1.5%, Lloyds Banking Group up 1.3%, NatWest advancing 1.5%, and Standard Chartered gaining 2%.

Defense stocks also posted notable gains: BAE Systems climbed 1.2%, Babcock International rose 1%, and Rolls-Royce jumped 4.2%.

In healthcare, AstraZeneca shares were up 0.7%.

By contrast, energy companies came under pressure as oil prices dropped, with BP falling 2.6% and Shell down 1.6%.

Bond Market Moves and Sterling

In the bond market, the 10-year UK government gilt yield fell below 4.4% after strong rises in the previous two sessions, including a 22 basis point surge driven by concerns over the Middle East war's impact on global inflation.

Expectations for a Bank of England rate cut have diminished, with market pricing now indicating only a 20% chance of a cut this month, down from around 75% a week ago. Markets now anticipate just one 25 basis point rate cut this year.

Sterling strengthened to around $1.338, rebounding from three-month lows, supported by a weaker dollar after reports of diplomatic efforts to end the conflict with Iran.

UK Economic Indicators

S&P Global data showed the UK's composite PMI recorded 53.7 in February 2026, holding at a 17-month high and signaling private sector expansion for a tenth consecutive month. Growth was supported by the fastest industrial output since September 2024, despite a slight services slowdown.

Employment continued to decline for the seventeenth straight month, while inflationary pressures eased somewhat as input cost and price increases moderated.

Growth Forecasts

The UK Office for Budget Responsibility (OBR) lowered its 2026 GDP growth forecast to 1.1% from a previous estimate of 1.4%, even before accounting for potential energy shocks. However, the OBR raised growth forecasts for 2027 and 2028 to 1.6% each, alongside expectations for falling borrowing and gradually easing inflationary pressures.

EcoPulse24 Analysis

The rebound in UK markets reflects investors' attempts to balance geopolitical risks with signs of domestic economic stability. With energy prices elevated and potential supply disruptions looming, Bank of England policy and gilt yields will remain key factors shaping the outlook for UK markets in the coming period.