Market snapshot: investors respond to US rate cut

Words rather than actions from the Federal Reserve drove a broad-based market rally which lifted the more traditional Dow Jones and smaller companies in particular.

The expected 0.25% rate cut was never going to grab the headlines, but accompanying comments which all but ruled out the possibility of rate rises in the face of sticky inflation boosted sentiment. The Russell 2000 index hit a new record high, given the reality that smaller companies particularly benefit from lower borrowing costs in order to grow their businesses.

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Elsewhere, the rally broadened from the previous reliance on the AI trade and mega cap technology stocks, with gains across a raft of sectors from materials and consumer discretionary to financials and healthcare. An additional bonus came in the form of a surprise announcement from the Fed that it would be cautiously returning to Quantitative Easing, with $40 billion of Treasury Bills purchases this month, thus injecting more liquidity into the system, with short-term yields falling as a result.

In supporting the economy and upgrading its growth forecasts, the Fed has paved the way for a Santa rally, with some speculating that the benchmark S&P500 could hit a new record level of 7,000 before the year is out.

Less positively perhaps is the outlook, where the central bank is currently assuming just one rate cut next year, although funds futures are pricing in a near 80% probability of two reductions. In any event, the latest move leaves the Fed as data-dependent as ever and in “wait and see” mode for the time being.

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Not all was sweetness and light, however, as Oracle Corp (NYSE:ORCL) provided a reminder that concerns over AI spending remain high in the investor consciousness. Weaker-than-expected earnings alongside an increase in AI spending sent the shares trading lower by 11.5% after hours, limiting the Nasdaq rally yesterday and with Dow futures pointing to a weak start for the tech-based index later today.

Even so, the latest gains mean that the main indices remain close to record highs as the final month of the year plays out. The Dow Jones is now ahead by 13% in the year to date and within a whisker of its previous record, while jumps of 17% and 22.5% for the S&P500 and Nasdaq respectively underscore how powerful the market moves have been despite a cocktail of potential headwinds.

For the UK, caution was the watchword in early trade, with few leads arising from the usual sectors such as defence and mining stocks as investors sought positive impetus without success. Associated British Foods (LSE:ABF) fell as a result of being marked ex-dividend, while Entain (LSE:ENT) also dipped as the announcement of a new CFO failed to spark much excitement in an increasingly beleaguered sector as a result of the recent Budget moves.

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Convatec Group (LSE:CTEC) attracted some interest in the tech medical space, with some strength also in the shares of AstraZeneca (LSE:AZN). Sainsbury (J) (LSE:SBRY) and Diageo (LSE:DGE) firmed on broker upgrades, although these positive drivers could not lift the premier index meaningfully at the open.

Even so, the FTSE100 remains ahead by 18% so far this year, and in recognition of the increasing interest in the UK from global investors, the FTSE250 has also posted a gain of 5.7% despite the travails surrounding the domestic economy.