High on optimism

Stockmarkets rallied to their highest levels this year on Monday as strong results from two of Britain’s largest banks and better-than expected figures on manufacturing across three continents suggested that the world was edging its way out of recession.

With profits at Barclays and HSBC on the rise and the world’s manufacturing sector returning to growth, oil and other commodity prices also rose as traders sensed recovery might be taking hold.

In London the FTSE 100 closed 1.6%, or 74 points, higher at 4 682.46 — its highest level since October last year — as news from the banking sector cheered markets. The FTSE is now up a third from its most recent trough on March 9.

Sterling also had a good day, surging by more than two cents against the dollar to reach its highest point since mid- October of almost $1.70 to the pound.

‘Investor sentiment is becoming more and more optimistic by the day and so far this week the banks are fuelling the momentum,” said Angus Campbell, head of sales at Capital Spreads. ‘The banking sector’s return to profitability should be considered a good thing, not just for the financial markets, but for UK taxpayers too as their stakes in RBS and Lloyds look more likely to give a return on their investment, albeit still over the long run.”

European stockmarkets, too, were buoyed by improving sentiment in the financial sector and key surveys of manufacturing firms around the continent were better than expected, suggesting that the meltdown at the end of last year was now past.

The pan-European FTSEurofirst 300 index rose 1.4% to its highest level in nine months. It was also supported by a solid performance on Wall Street, where the Institute of Supply Management’s monthly snapshot of the US manufacturing sector was also better than expected and the highest since last August, although it still showed a decline in output. Spending on construction projects also unexpectedly rose, further boosting confidence.

Paul Ashworth, of Capital Economics, said:’The jump in the US ISM manufacturing index to an 11-month high in July leaves it at a level consistent with GDP growth of roughly 1.5% at an annualised rate. This adds to the growing evidence that the recession ended around the middle of the year.

But there are still big question marks surrounding how strong the recovery will be and whether it can be sustained after the initial boost from pent-up demand fades.” As European markets closed, the Dow Jones was up by about 1% at 9 258.

Oil, too, benefited from the improved mood as dealers bet that a recovery in demand from the world’s factories would eventually lead to higher demand for energy to power them, much of which comes from oil.

The mood was helped by data suggesting Chinese factories were working at their fastest pace in a year.

The price of US light crude rose nearly $2 a barrel in busy New York trading to above $71 a barrel, marking the first time in a month that US oil has traded above the $70 level. In London, Brent prices rose $1.77 to $73.47 a barrel on the ICE exchange.

Some dealers, though, said the market may be setting itself up for a fall. ‘Even though I believe that we are setting up for a correction of epic proportions, we still have to respect the market’s movement and its blind ambition,” said Phil Flynn of Alaron Trading in the US.

Oil was also said to be boosted by the general weakness of the dollar, as investors dumped low-risk US treasury bonds in favour of riskier assets and currencies.

The greenback dropped to a 10- month low against a basket of major currencies. The euro hit its highest this year against the US currency at $1.442 — something that will not be welcomed by European firms hoping to export to the world’s biggest consumer economy.

Dealers said the dollar could have further to fall. ‘The improvement in US economic data should further boost risk-seeking and weigh on the dollar,” said Brian Kim, a currency strategist at UBS in the US.

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