UK shares shook off a poor opening on Wall Street to mount a strong run yesterday, with the help of oil stocks and some upbeat economic news.
BP and Shell both finished stronger as crude oil spent much of the day above $32 a barrel, a 10-year high, on fears that demand was outstripping supply. The oil sector contributed around 16 points to the FTSE 100's rise.
Meanwhile, UK retail price figures for July were a little better than expected. Prices fell 0.4 per cent on the month, thanks largely to the summer sales in clothing and footwear, keeping the underlying annual rate of inflation at 2.2 per cent. The markets had been expecting the annual rate to inch up to 2.3 per cent. The annual headline rate stayed at 3.3 per cent.
The Bank of England's monetary policy committee has left rates on hold for the last six months; the minutes of its latest meeting will be released today. "Today's figures suggest that a base rate increase in September is marginally less likely, although the MPC (monetary policy committee) will be training its sights more on longer-term inflation developments," said Philip Shaw, UK economist at Investec. "We would still come to the conclusion that it remains a little too early to be calling the peak in the interest rate cycle just yet."
Equity investors seemed to take the inflation news in good heart, however, and the FTSE 100 was never in negative territory at any time during the session. In the early part of the day, sentiment was helped by Wall Street's late rally on Monday. But even when the Dow Jones Industrial Average faltered during early trading yesterday, falling more than 100 points, Footsie stood up to the pressure.
The banking sector, a market heavyweight, supported the rise on hope of further consolidation following the Barclays/Woolwich bid.
A weaker pound was supportive of equities, with foreign exchange markets clearly deciding a rise in European interest rates was more likely than a change in the UK. The pound's trade-weighted level fell from 108.6 to 107.8, brightening the outlook for exporters.
The latest Merrill Lynch/Gallup survey of UK fund managers showed that the number of managers expecting higher base rates in 12 months' time had declined again. The survey found that managers had become more bullish on UK equities, with buyers outnumbering sellers by 23 percentage points. The favourite sectors were defensives, followed by financials.
Turnover picked up markedly from Monday with 1.42 billion shares traded by the 6 p.m. count. Over 92,000 deals were conducted, more than the recent average. As usual, Vodafone was by far the most active individual stock.
