European stock markets were in a positive mood on Friday in the wake of the latest measures announced by UK chancellor Rishi Sunak to help battle the cost of living crisis.
In London, the FTSE 100 (^FTSE) rose 0.4% by afternoon trade, on track for its strongest week of gains since March despite a weaker open, while the CAC (^FCHI) climbed 0.9% in Paris, and the Frankfurt DAX (^GDAXI) was 0.8% higher.
On Thursday, the finance minister unveiled a £15bn ($18.9bn) package to help UK households cope with inflation and surging energy bills. This was to be partly funded by a windfall tax on oil and gas profits.
Paul Johnson, director of the IFS, has since warned there was a risk that inflation could be driven even higher if Sunak gives into the temptation of offering more and more handouts.
“I think the biggest risk here is that the chancellor will be tempted to do this again and again and I think if that happens then we really could be in for a bit of trouble,” he told BBC’s Today Programme.
“The collapse in the UK’s services PMI, which fell to just 51.8 this month from the 58.9 reading in March, has raised a few alarm bells,” Matthew Ryan, senior market analyst at Ebury, said.
“News that UK energy prices are set to increase by another £800 on average in October raised fresh concerns that rising inflation could weigh on UK consumer spending activity in the second half of the year.
“Investors have, however, reacted positively to the unveiling of the government’s more generous-than-expected support plan on Thursday. This appears to be supporting sterling, which looks likely to post its second consecutive week of gains against the dollar.”
The main indices in the US are currently also on track for their first weekly gains since March.
In the year to date, the benchmark S&P 500 is down by 15%, having narrowly avoided bear market territory earlier in the week, while the Dow Jones has lost 10% and the Nasdaq 25%.
Traders are gearing up for fresh economic data that will likely offer clues on US consumer spending strength amid red-hot inflation. The Commerce Department's report is expected to show consumer spending rose 0.7% in April, easing from a stronger 1.1% in March.
On Thursday, new data showed that the American economy shrank 1.5% in the first three months of the year — a slight downgrade on previous estimates.
The contraction was caused in part by a wider trade gap, with the nation spending more on imports than other countries did on its exports. A slower restocking of goods in stores and warehouses also had a part to play.
Read more: What is a windfall tax?
Meanwhile, separate data showed applications for US unemployment insurance declined last week by more than forecast,
According to the Labour Department, initial unemployment claims fell by 8,000 to 210,000 in the week ended 21 May.
“In addition, the reported cooling of tensions between China and the US, and the likelihood of more stimulus from the former to support the local economy underpinned the positive moves,” Richard Hunter, head of markets at Interactive Investor, said.