Market Report: Hopes of fiscal cliff deal lift festive mood

Hopes of a deal in the United States fiscal cliff negotiations lifted stock markets across the world yesterday and boosted feelings that 2012 will end on an economic high. While a record-breaking Santa Rally is almost certainly out of the question, experts said positive news from across the pond could propel markets beyond their current level.

Angus Campbell, head of market analysis at Capital Spreads, said: "Whilst we shouldn't be too surprised with how the negotiations are playing out, since politicians are notorious in agreeing anything at the very last minute, it doesn't help at a time of year when investors could really do without such uncertainty shrouding the markets.

"Investors need a catalyst to send the index upwards, and that is only most likely to come in the form of a satisfactory resolution to the US fiscal cliff negotiations, so we continue to wait in hope."

The FTSE 100 rose 23.75 points to 5,935.9 following Monday's fall, while the wider FTSE 250 climbed 74.67 points to 12,293.25.

Carnival, the cruise line operator, was one of the big risers, advancing 61p to 2532p ahead of results later this week.

G4S, the nation's favourite support services group, also climbed 6.7p to 257p following reports that it is in line to benefit from the Government's welfare reforms. The group, which is best known for its Olympic security fiasco, is believed to be one of six companies selected to run call centres on behalf of the state.

Analysts at Panmure raised their rating on the company from hold to buy. "We think there is scope for the shares to recover back to their pre-Olympic peak, and do not subscribe to the view that the UK government outsourcing market is firmly shut for the company. As the outsourcing sector has continued to re-rate, G4S has stood still, presenting an attractive entry point heading into 2013 in our view."

Elsewhere, Costa Coffee owner Whitbread advanced 46p to 2465p after agreeing a £51m sale and leaseback of seven Premier Inn and restaurant properties.

Analysts at Liberum Capital welcomed the development. "This is a timely reminder of Whitbread's strong asset backing and the value the company is creating from freehold asset developments. We had already assumed a sale and leaseback of a similar scale (£59m) this year, but believe consensus will need to account for this development."

The temporary power supplier Aggreko was also in on the act, rebounding after a profits warning on Monday. Shares in the company were up 40p to 1704p a day after the group warned of lower revenues on the back of military spending cuts.

At the other end of the scale, Petrofac was a surprise faller, retreating 19p to 1,661p after the company said it was on course to increase its annual profits by 15 per cent due to a strong pipeline of contracts.

The oil services group, which posted profits of $539m (£333m) last year, said it had a backlog, or estimated revenue flow, of $11.6bn.

Bank of America Merrill Lynch said: "We think a bumper backlog estimate of $11.6bn for 2012 will be taken well by the market who were fearful of something under $10bn only three months ago. They are one of the few companies who haven't warned."

Vodafone also dipped 1.95p to 156.25p following news that it lost 2.4 million customers in India last month.

Among the mid-caps, investors were left to ponder whether Direct Line Group is about to hit the skids.

Those talking heads at Berenberg seemed to think so, initiating coverage on the motor insurer with a sell, and warning the company is "on the road to nowhere".

Direct Line shares have risen by about 22 per cent since they were listed on the London Stock Exchange at 175p in October. The owner of brands including Churchill and Green Flag is on course to enter the FTSE 250 this month, yet analysts at Berenberg are still unconvinced.

"We think the company is unlikely to achieve its 15 per cent return on tangible equity targets due to adverse market dynamics (particularly in UK motor), regulatory changes and falling investment yields," they said. "These factors are not sufficiently reflected in the share price, in our view; the company seems to enjoy considerable credit for profitability improvements that have not yet materialised."

Despite this, shares in the group rose 3p to 213p.

Buy

Catlin

The Lloyd's of London insurer Catlin may have been saddled with heavy losses from Superstorm Sandy but analysts at Espirito Santo still believe it's a stock to buy. The company said the storm was likely to cost it about $200m (£123m), but analysts reckon this is manageable and will turn an otherwise strong year into a more average one – with no longer-term implications for the company.

Espirito Santo is also bullish on fellow Lloyd's insurer Novae, which said it expected losses of up to $30m from the natural disaster.

Hold

Morgan Sindall

The broker Panmure Gordon believes investors should heed caution when it comes to the construction group Morgan Sindall. Despite a pre-close trading update in line with expectations yesterday, Panmure said the construction market remained tough and the company's outlook was "challenging".

Sell

Aveva

Seymour Pierce reckons its time to Sell the software group Aveva following its acquisition of the engineering simulation company Global Majic Software. While arguing that the fundamentals behind the deal are good, Seymour Pierce says the company's share price is overvalued following a recent rally, and says investors should cash their chips in now.