Fed rates comment triggers Wall Street sell-off, FTSE 100 follows suit, no Bank of England cut expected today, water companies get bills boost, Serco sees bumper pipeline

“Markets are normally good at reading the signs, but the sell-off on Wall Street last night would suggest investors had started on the Christmas sherry a bit early and were caught out by the Fed’s announcement about where rates might go in 2025,” says Russ Mould, Investment Director at AJ Bell.

“The prospect of a slowdown in interest rate cuts was front and centre days before the Fed’s latest update, but investors seemed to miss the signs.

“The US economy has been holding up well and Donald Trump’s policies are inflationary, meaning the Fed has no reason to keep snipping away on a regular basis.

“Despite this situation being clearly visible, markets had continued to push on higher and cast aside the negatives associated with Trump’s return to the White House.

“The 3% drop in the S&P 500 is a wake-up call that US markets are not a one-way ticket to the moon.

“The fact futures prices are showing a rebound in the main US equities on Thursday would suggest we are not at the start of a full-blown market correction. Instead, it’s more likely that investors are now sitting up and paying more attention to what could go wrong, rather than only focusing on the positives. That’s long overdue and a healthy development.

“We might be at the beginning of the end in the Fed’s rate cutting cycle, particularly if inflationary pressures rise because of Trump’s policies, including tariffs. Remember that central banks push up rates to fight inflation and they cut them when inflation eases. What we’ve had is a change in the narrative from the Fed and markets are now reacting as if it’s a complete shock, when it shouldn’t have been.

“The Bank of England seems to be one step ahead of the Fed for once. It’s not expected to cut rates at the meeting today as sticky inflation and rising wages mean it has no reason to loosen monetary policy. Like the Fed’s latest announcement, of more importance is any commentary from the Bank of England on where it sees rates going next year.

“The Fed’s shifting narrative matters to more than just people in the US as its actions tend to influence investor sentiment globally. If the Fed is now playing the ‘rates higher for longer’ game, it suggests to investors in the UK that the Bank of England will do the same. That’s why housebuilders were among the biggest fallers on the FTSE 100, alongside economically sensitive stocks such as packaging groups Mondi and DS Smith, together with banks Barclays and NatWest.

“There were only three risers on the FTSE 100, implying a risk-off day for investors. The risers were all ‘defensive’ companies – Severn Trent, United Utilities and Imperial Brands – namely ones that should tick along whether the economy is good or bad.”

Water companies

“The reputation of the water utility industry must be plumbing new depths usually reserved for lawyers and estate agents, and news of further price rises will have done nothing to burnish its standing with the general public.

“The market seems to be more favourable, judging by the increase in the share prices of Pennon, United Utilities and Severn Trent – even if the regulator hasn’t allowed price increases quite on the scale the sector was looking for.

“A 36% average increase through to 2030 is a lot better from the perspective of these companies and their shareholders than the 21% suggested by draft determinations issued in July.

“This news may not trigger a flood of new buyers for water company shares given a lot of the increase in bills will go towards investing in creaking infrastructure. After all, with bills going up but problems around sewage spills and water outages continuing at current levels, some will feel this doesn’t appear a sustainable state of affairs.

“The problem child in a family of delinquents remains Thames Water and the smaller than requested increase in bills it received is unlikely to be sufficient to resolve its financial problems.”

Serco

“It’s been a difficult decade for Serco, which started with scandals, losses and a strained balance sheet and has seen an uneven recovery since.

“However, the outsourcing giant now reports a pipeline of business opportunities which are the strongest seen in 10 years.

“Order intake was much improved in the second half of the year; cash generation looks robust; and the balance sheet is in reasonable shape. This creates the conditions for the company to invest for future growth and return capital to shareholders.

“The company is doing well in North America, particularly in the defence space, and is starting to gain traction in mainland Europe. That’s helped to make up for a less happy time domestically. As a company which employs large numbers of people, some of which are on relatively low wages, it faces a big impact from the increase in employer National Insurance contributions and the hike in the national living wage announced in the Budget.

“Notably, Serco has also seen lower revenue on its UK immigration contract and is reportedly embroiled in legal proceedings against the UK Government over a prison services contract – hardly ideal when it is one of its major clients.”

These articles are for information purposes only and are not a personal recommendation or advice.