Market hits ten-month high on back of hopes for recovery

Published on Monday 3 August 2009 21:47

SHARES in Britain's biggest companies headed north yesterday, propelling the London market to a ten-month high on growing hopes for an economic recovery.

The 1.6 per cent surge in the benchmark FTSE 100 index came as banking giants Barclays and HSBC posted robust interim profits and data showed the UK's embattled manufacturing sector expanding for the first time in 16 months.

That helped push the pound to a ten-month high against the dollar as economists bet the economy would pull out of a technical recession – defined as two consecutive quarters of contraction – by the end of the year.

Shares in Barclays climbed 6.7 per cent to 322.55p after the bank reported an 8 per cent rise in half-year profits to almost 3 billion, while HSBC rose 5 per cent to 635.9p after it posted better-than-expected profits of $5bn (2.98bn).

Elsewhere in the sector, part-nationalised Lloyds and Royal Bank of Scotland – both due to report interim results later this week – gained 0.25p to 85.25p and 1.56p or 3.5 per cent to 46.41p respectively.

The Footsie ended the session up 74.1 points at 4,682.5, its strongest closing level since the collapse of Lehman Brothers last October, also helped by early positive trading in the US, where the Dow Jones industrial average gained 114.95 points, or 1.25 per cent, to end at 9,286.56.

The main UK index is up by almost a third since hitting a closing low for 2009 on 9 March and last week put in its best weekly performance since April 2003. Analysts last night warned markets remained vulnerable to profit-taking, but predicted further upward momentum as improved global GDP data fed through to equities.

Mike Lenhoff, chief strategist at stockbroker Brewin Dolphin, said: "Forecasts for GDP growth throughout Asia have been revised up for several months now and, following the better-than-expected second-quarter GDP figures out of the US last week, much the same can be expected there.

"It is unlikely that, against this backdrop, equity markets will come back by much and, if anything, their upward momentum is more likely to be sustained."

David Fineberg, head of western trading at CMC Markets, said: "Traders are somewhat split on the next direction with many questioning why the markets are continuing to rally. However, justified or not ,the rally is showing no signs of slowing."

Angus Campbell, head of sales at Capital Spreads, added: "Investor sentiment is becoming more and more optimistic by the day and so far this week banks are fuelling the momentum."

Markets took heart after the Chartered Institute of Purchasing & Supply's closely-watched purchasing managers' index showed signs of life in the beleaguered manufacturing sector.

The headline measure of activity rose to 50.8 in July, above the neutral 50 mark for the first time since March 2008 and well ahead of City expectations.

Hetal Mehta, senior economic advisor to the Ernst & Young Item Club, described the Cips data as "encouraging" and said there was an increasing chance the economy will pull out of technical recession by the end of the year.

But she cautioned: "The economy is not out of the woods yet.

"With manufacturing prospects closely linked to world trade, weak external demand remains a threat to a sustained recovery."

The stronger equity markets also pushed oil prices higher, with US crude touching a five-week high of about $72 a barrel, as signs of an economic recovery sparked expectations of resurgent energy demand. Brent crude pushed above $73 a barrel.

Defensive tobacco stocks, food producers and utilities were in the doldrums yesterday as risk aversion among investors retreated.

Imperial Tobacco declined 2.5 per cent to 1,669p, while British American Tobacco fell 1.9 per cent to 1,823p.