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“Considerably lower than expected inflation figures have put a rocket under the UK stock market as investors take the view the Bank of England will have no choice but to cut rates soon,” says Russ Mould, Investment Director at AJ Bell.
“The FTSE 100 jumped 1.3% to 7,733 while the FTSE 250 advanced 1.1%. The biggest risers included housebuilders and retailers as they stand to benefit from any cut in interest rates. Lower rates would make mortgages more affordable and rev up the property market while also relieving pressure on household finances.
“Interestingly, banks also shot up on the news. In theory, lower interest rates are bad for bank earnings so perhaps investors are taking the view this situation could be offset by higher lending volumes.
“UK CPI fell to 3.9% in November versus 4.6% in October, much lower than the 4.4% forecast by analysts. Core CPI, which excludes food and energy prices, fell from 5.7% to 5.1% versus expectations of 5.6%. The difference between expectations and reality is vast and has taken the market by surprise.
“The Bank of England has been pushing up rates to fight inflation but now faces a situation where rates look too high and cuts could come too late to avoid an economic slump. On the other hand, issues in the Red Sea threaten supply chains and have pushed up the oil price, both drivers for inflation. Therefore, this is a somewhat muddy situation.
“While UK stocks are merrily trucking ahead, Chinese shares are doing the opposite. The Shanghai SE Composite hit a new three-year low as investors readjust expectations for economic growth in the country. The index’s decline suggests investors are losing optimism regarding government stimulus measures that have historically been catalysts to get the country and shares moving again.
“It’s fair to say that sentiment towards Chinese stocks is at rock bottom. A year ago, there were high hopes that the relaxation of Covid rules would lead to a consumer and business spending spree, but the economic recovery has not lived up to expectations. We now end the year with Chinese shares in the doldrums and few people willing to load up on this part of the market.”
Fedex
“Another FedEx warning suggests bad news for the US and global economy could be in the post. The business is often seen as a barometer of wider economic conditions because it has broad exposure across areas like transportation, logistics and e-commerce.
“The shares were down nearly 10% in after-hours trading and worryingly for others this appears to be demand-driven. One factor which has less to do with the economy and more to do with industry dynamics is United Parcel Service winning back customers it previously lost.
“FedEx has made progress on margins and profit despite the lower revenue as it looks to reduce its cost base and increase efficiency. However, earnings for its second quarter were still short of expectations.
“Chief executive Raj Subramaniam, who took over from founder Fred Smith in June last year, may find his position comes under mounting scrutiny if he can’t get the business on track.”
Petrofac
“Energy services business Petrofac has been deeply unpopular with investors after a chequered history which included fines for corruption, uneven financial performance and a weak balance sheet. Therefore, any good news was always going to spark a positive share price reaction.
“This has proved correct with short sellers caught out after Petrofac secured a big North Sea contract and confirmed revenue roughly in line with guidance.
“The shares may have surged 50% but the company’s market value is still just a fraction of what it was at the company’s zenith in the early 2010s.”
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