America’s central bank handed UK investors an early Christmas present today as rate-sensitive stocks surged on hopes of a turning point in global monetary policy.
The return of risk appetite followed the Federal Reserve’s December meeting, when rates were kept at a 22-year high of 5.25-5.5% and an updated “dot plot” chart of projections showed policymakers see the potential for three cuts in US interest rates in 2024.
With Fed chair Jerome Powell suggesting that the hiking cycle is "at or near peak", the Dow Jones Industrial Average last night hit a record high, while the S&P 500 index extended gains for 2023 to 24% at its highest level in two years.
Deutsche Bank strategist Jim Reid said: “One change to a dot plot doesn’t automatically completely change the direction for the economy but the risks that the Fed stubbornly holds in restrictive territory while the lag of policy hits has been reduced by their change of tone.”
Diminished fears of higher-for-longer borrowing costs were positive for European markets, where the FTSE 100 index hit its best level since September with a rise of over 150 points to more than 7,700.
A stronger pound, as the US dollar suffered on speculation of American rate cuts as early as the spring, meant an even bigger boost for the UK-focused FTSE 250, which surged 2.7% or 498 points to its highest point since the summer at 19,194.
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In the top flight, grocery robotics business Ocado Group (LSE:OCDO) jumped 9%, or 57.2p to 705.8p as it benefited from a rotation back to growth and technology stocks alongside wider hopes of a consumer-spending boost.
The increased chances of a soft landing for the world’s largest economy were particularly beneficial for Sunbelt equipment hire owner Ashtead Group (LSE:AHT).
It downgraded full-year guidance last month due to lower levels of emergency response activity, but the share price losses that stemmed from that warning have now been recouped after today’s rise of 426p to 5,406p.
Most of Ashtead’s revenues come from North America, where it hopes to benefit from an increasing number of US mega-projects.
Other strong performances came in the property sector after a long period when valuations have been depressed by investors demanding better returns to match bond yields.
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Land Securities Group (LSE:LAND) topped 700p for the first time since February after a gain of 67p, while student accommodation firm UNITE Group (LSE:UTG) hit a high for the year with an improvement of 42p to 1,049p.
Other beneficiaries included West Africa-focused Endeavour Mining (LSE:EDV), which surged 122p to 1,815p after the gold price returned back above $2,000 an ounce due to dollar weakness and the lower interest rate expectations.
The developments also helped housebuilders to continue the momentum that’s recently been in evidence due to signs that UK house prices have steadied.
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The pair rose even though this afternoon’s monetary policy announcement by the Bank of England suggested that UK borrowing costs are likely to stay higher for longer due to persistent inflation pressures and a tight labour market.
National Express owner Mobico Group (LSE:MCG) also cheered 10% or 6.4p to 71.1p as the prospect of falling interest rates boosted the outlook for debt servicing costs. The coach operator recently suspended dividend payments so it could focus on rebuilding its balance sheet.
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