LONDON (Alliance News) - London's main indices ended higher Tuesday following eight consecutive sessions finishing in the red, while better-than-expected US inflation data paved the way for the Federal Reserve to raise interest rates, with its two-day monetary policy meeting underway.
A recovery in oil prices from fresh seven-year lows seen on Monday supported stocks in Europe and the US. At the London close, Brent crude was sitting at USD38.50 a barrel compared to the USD36.32 a barrel low it touched on Monday. West Texas Intermediate was at USD37.09 a barrel, compared to its Monday low of USD34.51 a barrel.
The FTSE 100 index added 2.5% at 6,017.79 points, up from the three-moth low it touched on Monday. The FTSE 250 ended up 1.4% at 16,999.56 and the AIM All-Share closed up 0.3% at 719.52.
In Europe, the CAC 40 in Paris ended up 3.2% and the DAX 30 in Frankfurt closed up 3.1%.
At the London close, US stocks were higher, with the Dow 30 and the S&P 500 both up 1.0% and the Nasdaq Composite up 1.8%.
The Fed started on Tuesday its two-day policy meeting which analysts widely expect to bring the first US interest rate hike in almost 10 years. The last time the Fed increased rates was in June 2006.
Economic data from the US, particularly labour statistics, have continued to strengthen since the Fed's last meeting in October, while comments from Fed Chair Janet Yellen and other members of the Federal Open Market Committee remained supportive of a 25 basis point rate hike to take Fed Funds rate to 0.25%-0.5%.
A 25-basis point increase in interest rates is a marginal change in a historical context, but is an important first step after the devastating effects of the global financial crisis of 2008-09. Markets have been forecasting the move for some time, and there will be a great deal of interest in the details of the FOMC statement, released at 1900 GMT on Wednesday with the policy decision. Yellen's press conference will follow at 1930 GMT.
Societe Generale economist Aneta Markowska said Yellen will need to strike a delicate balance between sounding sufficiently positive on the economy to justify the interest rate hike, but not so positive that the market extrapolates this out to expecting a steeper tightening path.
With the Fed having repeatedly said that any monetary policy decision will be "data-dependent", US inflation data released Tuesday supported again market expectations for a "lift-off" on Wednesday.
"US inflation data has come out better than expected despite oil prices dropping over the last few weeks," said James Hughes, chief market analyst at GFKX. "The better-than-expected numbers is further confirmation that the Fed will raise interest rates at tomorrow's meeting and not disappoint the markets."
Data from the US Labor Department showed that while the consumer price index was flat month-on-month in November, in line with economists forecasts, the annual rate of consumer price growth accelerated to 0.5% in November from 0.2% in October. Economists expected the year-on-year figure to grow by 0.4%.
The month-on-month reading of the consumer price index was unchanged even though energy prices tumbled by 1.3% in November following a 0.3% increase in the previous month. Gasoline prices dropped by 2.4%, while prices for natural gas and fuel oil slumped by 1.9% and 1.3%, respectively.
The report also showed a modest drop in food prices, which edged down by 0.1% in November after inching up by 0.1% in October. Excluding food and energy prices, the core consumer price index rose by 0.2% in November, matching the increases seen in the two previous months as well as expectations.
Outside of the US, data from the Office for National Statistics showed UK inflation turned positive in November, largely driven by transport costs, while factory gate prices continued their downward trend.
Consumer prices edged up 0.1% year-on-year in November, reversing a 0.1% fall in October, and matching economists expectations. Month-on-month, consumer prices remained flat after rising 0.1% a month ago, but beating estimates for a 0.1% drop. Core inflation, which excludes energy, food, alcoholic beverages and tobacco, rose slightly to 1.2% in November, in line with expectations, after adding 1.1% in October.
The pound remained broadly unchanged against the dollar after the UK inflation data, but the greenback gained ground after the US inflation figures were released, with sterling standing at USD1.5050 at the London close. On Tuesday, the pound was quoted at USD1.5136 at the close.
Meanwhile, German economic confidence improved for the second straight month in December, the survey carried out by the Mannheim-based Centre for European Economic Research showed Tuesday. The ZEW Indicator of Economic Sentiment rose by a more-than-expected 5.7 points to 16.1 in December. This was the highest score since July, when it was 29.7. The expected level was 15 for December.
At the London close, the euro was at USD1.0926, having stood at USD1.1040 at the close on Tuesday. Meanwhile, gold was priced at USD1,060.48.
UK-listed oil stocks were amongst the best performers, helped by the recovery in crude prices. Blue-chip Royal Dutch Shell 'A' added 3.1%, BG Group ended up 2.9% and BP up 2.6%, while mid-cap Tullow Oil rose 5.1% and Petrofac closed up 5.3%.
Shell shares were also in favour after the oil giant said it has signed a deal with China National Offshore Oil Corp that will expand the existing partnership between the two companies and lead to more chemical facilities being developed in China.
The two companies already have a 50:50 joint venture in China, but has now signed a heads of agreements to expand the venture, with Shell joining an ongoing China National Offshore Oil Corp project to develop additional chemical facilities next to the joint venture's existing Nanhai petrochemical complex.
Tullow Oil said it has encountered a net oil pay at the Etom-2 well in northern Kenya and said its Ngamia well in the country has produced thousands of barrels of oil per day under test conditions. The FTSE 250-listed oil producer said the Etom-2 well on Block 13T encountered 102 metres of net oil pay in two columns after being drilled to a total depth of 1,655 metres.
FTSE 100-listed supermarkets ended amongst the top gainers after the latest UK market share data from Kantar Worldpanel for the 12 weeks to December 6.
J Sainsbury shares added 5.2% after the Kantar survey revealed its sales in the period rose 1.2% to GBP4.35 billion from GBP4.30 billion a year earlier, helping its market share rise to 16.7% from 16.5%.
Of the UK big four, Sainsbury's was the only one to have delivered higher sales and market share year-on-year, as its rivals continue to feel the effect of discounters Aldi and Lidl. Those two once more produced sterling growth in the period, with Aldi sales up 15% and Lidl sales rising 18% year-on-year, as the pair's combined market share stayed at 10%.
Tesco ended up 3.3%. It saw sales decline 3.4% in the period, with its market share shrinking to 28.0% from 29.1%. Wm Morrison Supermarkets rose 4.9%. It had a sales decline of 2.0%, while its market share slipped to 11.0% from 11.2%.
South Africa-exposed stocks such as Old Mutual, up 5.3% and Investec, up 4.6%, continued their recovery from the heavy losses seen last week, when the South African rand dropped to four-year lows against the dollar after some instability in the country's government.
The rand hit record lows against the dollar following the dismissal of South African Finance Minister Nhlanhla Nene last Wednesday. Nene was then replaced by little-known parliamentarian David Van Rooyen.
However, on Monday, South African President Jacob Zuma appointed Pravin Gordhan, who had held the finance minister position prior to Nene, back to the role, replacing Van Rooyen, who held the job for only a week. The rand was at USD0.0667 at the London close.
In the FTSE 250, AVEVA Group finished by far as the worst mid-cap performer, down 31% at 1,487.90p. The engineering software and IT systems provider said its proposed acquisition of industrial software assets from France's Schneider Electric SA has been terminated. The deal would have effectively been a takeover of AVEVA by Schneider.
AVEVA and Schneider reached a non-binding agreement in July, under which AVEVA would acquire industrial software assets from Schneider in cash and shares, giving Schneider a 53.5% stake in the FTSE 250-listed company. The deal had been valued at around GBP1.3 billion.
But on Tuesday, AVEVA said the pair had been unable to reach a definitive agreement and said the talks had been terminated. The non-binding nature of the agreement means no break-fees will be paid by either side.
The stock touched a low of 1,355.00p in early trade, a level it hasn't seen since February, but recovered throughout the session and finished at 1,596.72p.
Circassia Pharmaceuticals ended as the best performer in the FTSE 250, up 8.9%, after RBC Capital initiated its coverage on the company with a 'Top Pick' rating. BTG was another pharmaceutical stock to benefit due to coverage by RBC Capital, which send the stock up 7.0% after initiating it with Outperform.
In the UK corporate calendar Wednesday, Dixons Carphone and SuperGroup release half-year results and Bunzl issues a trading statement. Idox publishes full-year results and Tungsten Corp releases half-year results.
In the economic calendar, Markit manufacturing, services and composite Purchasing Manager's Index readings from France, Germany and the eurozone are expected at 0800 GMT, 0830 GMT and 0900 GMT, respectively. The UK's unemployment rate is due at 0930 GMT, while the eurozone consumer price index is at 1000 GMT.
In the US, building permits and housing starts data are due at 1330 GMT. Markit manufacturing PMI is due at 1445 GMT, while EIA crude oil stocks are expected at 1530 GMT.
By Daniel Ruiz; danielruiz@alliancenews.com
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