China and Basel unite to drive FTSE

Leading London shares marched ahead yesterday as new banking regulations agreed at the weekend and reassuring Chinese data whetted investors' appetite for risk.

The benchmark FTSE 100 index ended the session almost 64 points higher at 5,565.53 - a rise of 1.2 per cent. At the close of play in London, Wall Street's Dow Jones Industrial Average was nearly 1 per cent ahead.

Stock markets had been put on the front foot after new rules on bank reserves and strong economic data in China lifted banking and mining stocks.

Anthony Grech, head of research at IG Index, said: "It has been a strong performance across all sectors."

The latest City gains came as experts predicted a near-10 per cent rally for UK blue-chips by the year end. Some analysts are forecasting the top flight could hit 6,000 in what would be a marked turnaround on the sharp falls seen a few weeks ago.

A robust half-year earnings season and pick-up in the pace of global merger and acquisition news has helped offset the double-dip recession fears that haunted the market earlier this summer.

Banks added the most points to the Footsie yesterday after a deal by regulators on Sunday gave banks an extended period in which to more than triple their minimum cash reserves and help prevent a fresh credit crisis. The deal capped fears of a stampede for fresh capital and prompted fresh buying, with Lloyds Banking Group leading the sector with a 2.6 per cent gain to 77.61p.

Kishan Mandalia, a trader at City Index, cited Lloyds' undervaluation relative to Barclays and stronger balance sheet than state-backed peer Royal Bank of Scotland, adding: "A lot of investors are flying to Lloyds because the potential for upside is better."

The generous time given to banks to build up balance sheet strength under the new Basel III rules had particularly helped Lloyds and RBS, which rose 2.4 per cent to 49.67p, noted IG Index's Grech.

Elsewhere, traders piled into Prudential, which jumped 4 per cent at one stage, on speculation of potential takeover interest in the UK insurer from a group of Chinese investors.

The billionaire entrepreneurs had wanted to throw their weight behind the Pru's failed takeover bid for the AIG division AIA, but are now reportedly in the early stages of considering a deal to take control of Prudential's Asian business. Pru shares lifted 18.5p to 618p.

BAE Systems was also looking strong after the defence giant hired advisers to help it consider the sale of its US-based platform solutions division.With a deal set to raise as much as 1.3 billion for the UK firm, shares were 10.2p higher at 333.1p.

Primark parent Associated British Foods sank to the bottom of the FTSE 100, after it warned that increases in its costs and looming VAT changes would put retail margins under pressure next year.

AB Foods is also fighting against soaring wheat prices at its food arm, which includes Kingsmill and Allinson bread company Allied Bakeries.

Despite forecasting full-year sales and profits at the budget clothing group to be "well ahead", shares fell 16p to 1,072p.