Blue chip shares staged a strong comeback yesterday, despite some unhelpful economic news, as investors decided there were some bargains to be had. But one trader warned: "This was a bear squeeze linked to the expiry of stock option contracts. Don't think the market is going to shoot higher because of this."
The FTSE 100 index had briefly dipped below 6,000 on Tuesday but when the market opened yesterday, it was clear there was little danger of a repeat. The near-200 point rise in the Dow Jones Industrial Average overnight gave a boost to sentiment and Footsie quickly moved to an 100 point gain.
The rally was nearly undermined, however, by the release of the labour market data at 9.30 a.m..
The average earnings numbers came as a distinctly nasty surprise to the market. The annual growth rate was expected to move up a bit from the previous 4.9 per cent but 5.5 per cent was much higher than expected. Millennium bonuses (for working on New Year's Eve) and normal annual bonuses took part of the blame. Nevertheless, it is unlikely the Bank of England, which thinks that wages should not be growing faster than 4.5 per cent, will be impressed.
The British economy department at Salomon Smith Barney/Citibank noted: "These data will reinforce the monetary policy committee's worries about the inflation risks posed by the mix of above-trend growth and the lack of spare capacity. At some point, and probably fairly soon, the MPC will need to hike rates far enough to slow domestic demand back to trend and the strength of most activity data suggests that this will require rates to be a good deal higher than generally expected."
The short sterling future slipped slightly on the day, indicating that investors' interest-rate expectations had increased.
Footsie lost some of its strength after the figures but surged ahead again on the afternoon to close 142.2 points up at 6,147.7. For once the blue chip index produced a much better performance than the smaller and medium-sized stocks. The FTSE 250 gained just 31.5 to 6,166.5 and the SmallCap index actually fell 3.6 to 3,167.2. There were some signs that "old economy" stocks were moving back into favour. Mining group Billiton was the best performer in the Footsie.
In the FTSE 250, water group Kelda, which had been trading on a double digit dividend yield, staged a rebound. However, technology stocks lost none of their appeal to investors. The Techmark index jumped another 88.1 to 4,901.6. There were big gains for FTSE 250 technology stocks such as Eidos, Morse and Psion. Trading volume was 2.6 billion shares by the 6 p.m. count, of which more than 600 million was in Vodafone Airtouch.
