Daily market update: US rate cut, Oracle, Drax

Another day, another rate cut. What’s normally a driver for equity markets has become old news, and investors have shrugged off the Fed’s latest reduction in US borrowing costs as it is becoming harder to guess where rates might go next.

The fanfare around rate cuts was short-lived. European markets were nonplussed at the news, and Wall Street is set for a red day judging by futures prices.

The Federal Reserve’s committee members do not see eye to eye. While the central bank proceeded with an interest rate cut, two voters weren’t in favour and Trump’s wing man Stephen Miran continues to push for deep cuts.

It’s not out of the ordinary to see different views but it does create a challenge for whoever takes over from Jerome Powell as Fed chair next year.

The US has avoided recession, the jobs market is softer but not crumbling, and inflation is proving to be sticky so one might take the view that further rate cuts could be minimal. However, we have a president who is keen for rates to come down a lot to help drive the economy, and who is doing their very best to have greater sway over the central bank.

Tech stocks were out of favour after Oracle disappointed with its latest results. The slightest bit of bad news around tech has the potential to cause jitters among investors, given they’re already on the edge of their seats worrying about excessive AI spending. The last thing they want to hear is a big tech company not earning as much as forecast and spending more than expected.

Oracle

Anyone looking to Oracle for a positive prophecy on the AI sector will have been left feeling disappointed as it struck a conservative tone alongside its latest earnings.

Combined with lower-than-expected revenue and a big increase in data centre spending, the market was in no mood to be forgiving. The shares suffered double-digit losses in pre-market trading.

There may have been disappointment that revenue forecasts for the current financial year remain unchanged despite this increased outlay and are only expected to grow relatively modestly in the coming year. On top, its borrowing pile is growing at pace.

Oracle’s shares have now dropped more than 40% since peaking around the announcement of its $300 billion deal with OpenAI in September. There is increased concern about so-called ‘vendor financing’ in the AI space, with companies investing in customers who use that money to buy more products.

In the late 1990s, during the dotcom boom, internet equipment giants engaged heavily in this sort of activity and while this helped boost demand in the near term, it then exacerbated the resulting crash.

Drax

A key component of the artificial intelligence story is the associated energy demands and Drax clearly sees an opportunity to benefit.

The company has unveiled proposals to repurpose existing infrastructure and grid links at its Yorkshire power station to make its own contribution to the growth of AI.

Once fuelled by the coal which was central to the industrial revolution, upgraded infrastructure will be utilised to run a data centre as part of the latest phase of technological advancement.

The plan is to have this up and running within the next two years. In the meantime, Drax sees earnings for the current year at the top end of expectations and remains on track to hit its medium-term targets. Healthy cash flow is expected to facilitate generous payouts to shareholders alongside investment for future growth.

Drax has started to shrug off the hit to its share price back in August when news of an FCA probe into its financial reporting around sourcing of biomass pellets was announced. However, ongoing controversy about its biomass strategy, the subsidies it receives and the process of burning wood pellets to generate power continue to hang over the company.