Market update - 8 December

The FTSE 100 was up 189.6 points at 4237.99 and the FTSE 250 advanced to 5921.68, up 236.15 points, at 11.46am today

The market rallied after President-elect Barack Obama unveiled plans for the biggest infrastructure investment programme in the US since Dwight Eisenhower championed the creation of the interstate highway system more than half a century ago. Investors bought into equities amid hopes that the initiative might stave off the worst of the recession, stimulate growth and put the American economy on a path to recovery.

Moving up

News of the stimulus package sparked gains across sectors, including insurance, where Prudential climbed to 330.25p, up 13.49 per cent or 39.25p, and construction, where Wolseley gained 11.72 per cent or 35.25p to 336p.

Miners were firm as investors looked forward to increased demand for commodities from the US. Vedanta Resources was the strongest, gaining 11.16 per cent or 58.5p at 582.5p.

On the second tier, the shift in sentiment also boosted the housing sector with Barratt Developments gaining 7.88 per cent or 4p to 54.75p and Persimmon advancing to 222.5p, up 11.81 per cent or 23.5p. The sector rallied despite a bearish note from Arbuthnot Securities, whose analysts said that a recovery was still distant.

“A key difference between the current housing market downturn and that of previous cycles is the speed of the deterioration in conditions. House prices declined 9.6 per cent in the 10 months to July 2008, against a mere 1.8 per cent decline seen in the first 10 months of the market downturn in 1988/89. In the 12 months to September 2008, both the Halifax and Nationwide showed house price declines of 12 per cent. Mortgage approvals are down around 70 per cent over the 18 months from their 2006 peak. Another key differentiator is the fact that all regions, almost simultaneously, have been affected. Previously, market conditions have tended to ripple out to the regions from the London/South East epicentre,” the broker said, adding:

“Across the board, irrespective of financing positions, the housebuilders have been forced to adjust away from a focus on margin and volume growth to a cash generation mode, where prices and hence margins are sacrificed to generate cash. The more highly geared and therefore cash hungry the housebuilder, the greater the discount required,”

Moving down

Carphone Warehouse traded lower, losing 3.76 per cent or 3.5p to 89.6p, after co-founder David Ross resigned from the board. The departure was prompted by the revelation that Mr Ross had failed to declare that he had used a large chunk of his shareholding in the group as security for personal loans. It also emerged this morning that Mr Ross had used part of his stakes in National Express, where he is chairman, and Big Yellow, where he is a director, to secure personal loans.

Cazenove, which weighed in on the news, said that while Mr Ross’s resignation did not signify a material change for Carphone Warehouse owing to his limited operational involvement, it is likely to create fears that he might be forced to sell his stake, thereby creating the risk of a substantial stock overhang.