The UK stock market had its fourth best day in history yesterday as share prices around the world surged in response to Barack Obama's pledge to boost the US economy with a massive public works spending package.
The FTSE 100 rose more than 6 per cent to 4,300.1 and the Dow Jones Euro Stoxx index climbed 8.8 per cent. In America, the Dow Jones Industrial Average closed up almost 3.5 per cent at 8,934.2.
Commodities stocks led the rally, trimming back recent sharp declines, on bets that the US president-elect's plan to spend on infrastructure projects would boost demand for oil, steel and other raw materials. In the UK, Royal Dutch Shell, BP and Anglo American rallied more than 6 per cent as commodity prices rose. US Steel, Alcoa, and Chevron all rose strongly in the US.
The surge in Europe and the US followed sharp jumps overnight in Japan's Nikkei 225 index, up 5.2 per cent, and Hong Kong's Hang Seng, which jumped 8.7 per cent.
Oil jumped after six days of falls, reacting to Mr Obama's pledge to support the economy and comments from Opec that producers could make a "significant" cut in output. In New York, crude for January delivery gained 7.1 per cent to settle at $43.71. America's embattled carmakers also gained, with General Motors rising 20.8 per cent, as Congress agreed in principle to provide financial support to the stricken industry.
Markets were responding to hopes that the new president and Congress will do whatever is needed to avert a long recession. The US rally continued gains that started on Friday as speculation mounted that the American financial authorities would take direct action to support the housing market.
The UK stock market was also boosted by a sharp fall in factory gate inflation, with the Office for National Statistics (ONS) saying that producers' output prices – which will feed into prices in the shops over the next few months – fell 0.7 per cent on the month in November. That follows a record 1 percentage point fall in October, and leaves the annual rate of output price inflation at 5.1 per cent last month, around half the peak seen in July, when oil hit almost $150 a barrel. The collapse in the price of oil to below $50 a barrel and the fall in food and other commodity costs saw input costs for British industry fall 3.3 per cent last month. The ONS reported that the prices of petroleum products declined by a record 8.3 per cent last month alone.
With the labour market subdued by a rapid increase in joblessness, inflationary pressures from higher wages are also remarkably weak. The data suggest that the Bank of England, which has a central forecast for inflation of 2 per cent next summer, may have to cut base rates further than expected to stimulate the economy.
Howard Archer, UK economist at Global Insight, said: "Inflation will plunge over the coming months in reaction to sharply lower oil and commodity prices, unemployment, December's VAT cut and favourable base effects. We expect interest rates to fall to a low of 0.50 per cent in the second quarter of 2009 and it is far from inconceivable that interest rates could come all the way down to zero."