The UK stock market extended its rally in the afternoon buoyed by news that the US economy grew faster than previously thought and signs that investors are taking an optimistic view of this week’s eurozone deal on Greek debt.
The FTSE 100 closed 67 points or 1.1% higher at 5,870, although early gains on Wall Street soon dissipated after John Boehner, Speaker in the House of Representatives said there had been no ‘substantive progress’ in talks to avert the so-called ‘fiscal cliff’ budget crisis in the past fortnight.
The Dow Jones industrial average traded just two points at 12,984 and the S&P 500 traded sideways at 1,409.
Earlier investors were cheered by data showing US gross domestic product grew at an annual rate of 2.7% in the third quarter. This is higher than the government’s estimate of 2% last month.
There was further good news on employment where the number of Americans filing new claims for unemployment benefit fell for a second week in a row.
However, offsetting the positive tone were other figures showing underlying US economic weakness. Stripping out the effect of inventory restocking, the US economy grew just 1.9%. Meanwhile there is general recognition that the fourth quarter will be tougher.
Chris Williams, chief economist of Markit, the financial data provider, said: ‘A slowing trend already looks likely in the fourth quarter due to storm disruptions and because business confidence has sunk to its lowest for a year, hit in particular by uncertainty caused by the looming fiscal cliff and ongoing worries about the euro zone crisis.’
Nevertheless, the good GDP figure was enough to push up oil prices with the Brent spot price surging close to £111 a barrel.
Meanwhile gold recovered some of yesterday’s sell-off, rising 0.3% or $4.9 to $1,724 an ounce.
On currency markets the euro firmed against the pound and the dollar to trade at 80.81p and $1.2961 respectively as this week’s deal on Greek debt eased the pressure on other countries and saw Italy’s 10-year borrowing costs fall to a two-year low.
The pound edged higher against the dollar at $1.6032.
In London mining stocks lead the rally with Kazkhmys (KAZ.L), Rio Tinto (RIO.L) and Antofagasta (ANTO.L) all up between 4% and 6%, and mining related stocks such as Johnson Matthey (JMAT.L) and Weir Group (WEIR.L) advanceing between 3% and 4%.
Wood Group (WG.L), the oil services provider, was the biggest FTSE 100 faller, sliding 4.3% to 783.4p after the Wood family trust and members of the Wood family sold their 4.4% stake in the company at 775p per share, for a total of £127 million pounds.
BSkyB (BSY.L) fell nearly 1% as analysts at Jefferies added to the nervousness surrounding media stocks following the publication of the Leveson report into press standards, by moving their rating to ‘underperform’ from ‘hold’.
DIY giant lags FTSE gains as French down tools
08.57: Home improvement group Kingfisher (KGF.L) was a red stain on a rising FTSE 100 in early Thursday trade, after it reported declining profits, particularly hurt by weak sales in its French DIY stores.
Challenges for Kingfisher
Reporting a 5.9% decline in profits for the third quarter of the year, Kingfisher chief executive Ian Cheshire said the group had endured a ‘particularly tough first half’ while ‘our markets remain challenging’.
As well as French stores Castorama and Brico Dépôt, Kingfisher also suffered a decline in sales at its B&Q stores in the UK and Ireland ‘reflecting the generally weak consumer backdrop in the UK and a particularly challenging environment in Ireland.’
Analyst Freddie George of Seymour Pierce reckons investors should sell. ‘We continue to be concerned that the decline in FY13 earnings is not just down to the one-offs of the extreme summer wet weather and the decline in the euro but is also structural,’ he commented.
With shares down by 1.7% to 276p, Kingfisher was one of only a handful of London listed shares moving downwards on Thursday as European markets followed Asian and American indices higher on the back of signs that the US fiscal cliff may actually be avoided.
Global shares gained after Speaker of the House John Boehner, an Ohio Republican, said he was optimistic a budget deal to avoid the 'fiscal cliff' threat of automatic tax rises and spending cuts could be worked out. Adding to the positive sentiment, President Obama said he hoped to get a deal done in the next four weeks. Jim Reid of Deutsche Bank provided a reminder about the market's fickleness in the face of these negotiations: 'It's fairly apt that we are approaching panto season as the fiscal cliff debate continues to follow a "oh no it isn't...... oh yes it is......" script', he wrote in his morning note.
Meanwhile, the leader of Japan’s opposition party, Shinzo Abe, again called for unlimited monetary policy easing, providing an extra boost to sentiment.
Even as doubts continued to surface about the viability of a deal to release the next tranche of aid for Greece – with ratings agency Moody’s saying that it provides liquidity relief but doesn't resolve the country's debt sustainability issues – all of Europe’s major markets moved higher, with indices in Germany, France, Italy and Spain up between 0.5% and 2.13%.
The euro, which tends to rise when investors are happy to take on a bit more risk, was up by 0.2% to $1.2976.
Invensys leads the pack on rail deal
In London, the FTSE 100 was 0.6% higher to 5839. Miners were on the riser, with Vedanta (VED.L, up 3.2% to 1090p), Rio Tinto ( 3% higher to 3031p) and ENRC (ENRC.L, up 2.9% to 272p) the biggest gainers.
On the mid-cap index, which was showing similar gains, Invensys (ISYS.L) leapt by 11.5% to 313p after several analyst upgrades following the British engineering group’s announcement yesterday evening that it was selling its rail business to Siemens. The £1.7 billion deal allows the company to return cash to shareholders and fix its pension deficit.
Analysts at Nomura, who have a ‘buy’ rating on Invensys shares, upped their target price to 370p, saying: ‘The simplification of the group structure should reduce any conglomerate discount, and the UK pension solution reduces funding uncertainty, which makes the group’s historical 20-25% discount to the sector seem unjustifiable to us.’
Charles Stanley upgraded Invensys shares from ‘hold’ to ‘accumulate’.