Investors prepare for jitters on Wall Street

Options on the CBOE Volatility Index, Wall Street's so-called fear gauge, were one of the top-traded contracts in the options market as investors made bets on a sharp jump in the index.

This week "is the real start of a month to be nervous about", said Brian Overby, senior options analyst at online brokerage TradeKing. "Especially, because the volatility has come off so much, there is a lot of complacency in the market. So if we get one (item of] bad news, that will cause a big jump."

September is typically a weak month for stocks, and volatility reaches its peak as traders are fully back to work from summer holidays.

The Dow and S&P 500 were on track on Friday to close the week with a seventh gain in the last eight sessions, a period that has seen US investors' worst fears about the economy start to dissipate.

The S&P 500 has rallied nearly 6 per cent since the end of August, a month when stocks skidded as investors worried that the economy was headed for a double-dip recession.

The gradual improvement in the data continued on Friday as US wholesale inventories surged by the largest amount in two years in July.

"That's going to support the probability that the third-quarter GDP is at least going to be a positive number," said Bruce Bittles, chief investment strategist at Robert W Baird & Co. "All of a sudden the numbers started to turn just enough to say that we're not going to have a double dip, and that forced a lot of money back into the market."

Highlighting a still weak economy, however, technology stocks came under pressure after National Semiconductor and Texas Instruments issued weak quarterly financial targets.

The Dow Jones Industrial Average gained 44 points, or 0.43 per cent, to 10,459.28. The Standard & Poor's 500 Index rose 5.13 points, or 0.46 per cent, to 1,109.31. The Nasdaq Composite Index added 5.06 points, or 0.23 per cent, to 2,241.26.

Markets on both sides of the Atlantic edged higher on Friday as concerns over the US economic recovery subsided.

The positive vibes in America settled investors in the UK at the end of a nervy week, where the FTSE 100 Index rose 7 points to a new four-month high at 5,501.64.

Thursday's better-than-expected jobs and trade data eased fears that the world's largest economy might slip back into recession, and a report today showed wholesale inventories and sales rose by 1.3 per cent in July - much higher than the 0.4 per cent predicted rise.

In the London market, banking stocks experienced mixed fortunes ahead of the finalisation of European rules likely to require firms to hold capital reserves of at least 7 per cent.

While most banks' capital ratios are well above that, it represents a marked increase on the capital requirements seen before the financial crisis.

The sector has endured a testing week after high-profile leadership changes at Barclays and HSBC and amid reports that recent stress tests into 91 EU banks were not rigorous enough.

Barclays fell 4.25p to 319.1p but Lloyds Banking Group gained for a second straight session after a note from UBS yesterday argued that it looked "overcapitalised" following its 13.5 billion rights issue and as loan losses inherited from HBOS came under control.

Lloyds shares rose another 0.9p to 75.6p, while fellow part-nationalised firm Royal Bank of Scotland lifted 0.4p to 48.5p.

Oil stocks were also weak, with Tullow Oil at the bottom of the pile, its shares down 2 per cent or 29p to 1,234p, and Cairn Energy not far behind, with its shares down 10p to 435p.

In a quiet session for corporate news, shares in construction firm Morgan Sindall jumped 7 per cent after it struck a 28 million deal to buy the bulk of the social housing contracts operated by collapsed firm Connaught.

Morgan's Staffordshire-based Lovell subsidiary said the newly acquired contracts would generate around 200m in additional annual revenues.