LONDON'S equity market looked to have come to terms with the prospect of a rise in US rates after the FOMC meeting held in Washington yesterday.
After six consecutive sessions of losses, the FTSE 100 index yesterday rallied strongly, largely on the back of the big rally on Wall Street.
On Monday, the Dow Jones Industrial Average picked up a confidence-restoring 100 points, and it built on that performance at the outset of trading on Wall Street yesterday when the Dow pushed up a further 26 points in quick time.
The FTSE 100 index, which had fallen over 200 points during the previous six sessions recouped 55.9 or 1.3 per cent to end the day at 4,270.7. Demand for the leaders spilled over into the second liners, where the FTSE Mid-250 put on a more sedate performance, finishing a net 15.8 ahead at 4,552.7. But the market's smaller stocks were overlooked with the FTSE SmallCap index showing a 0.4 decline at 2,311.7.
There was no news on the Fed during London market hours; a decision on rates was expected shortly after 7 p.m. London time.
Dealers said a rise of 25 basis points in US interest rates was fully priced into global markets and that Wall Street would probably consolidate its gains if that was the extent of the policy change. Some warned, however, that a no change policy or a 50 basis points increase would be unwelcome and could trigger another setback on US markets.
But the overall feeling in London was that Mr Alan Greenspan, the chairman of the Federai Reserve, had done an expert job in softening up markets to expect a rate rise. "He's warned of irrational exuberance, overheated asset prices and pre-emptive strikes," said one trader.
Gilts gave a measure of support to the equity market, climbing in a range of 6 to 11 ticks in front of today's auction of £2.5 billion worth of 10-year stock.
The big recovery in British stock prices was evident from the start of trading when market-makers, who added to the market's weakness on Monday by unloading all their remaining long positions ahead of the FOMC meeting, had to cope with buyers chasing British shares after the Dow's rise.
They hoisted their opening levels, hoping to head off any big buying orders, but encountered a flurry of buyers adopting the view that a correction had run its course in the short term.
Demand for good quality stocks continued throughout the morning and carried on into the afternoon when the Dow's early strength gave London a second wind, driving the FTSE up more than 50 points.
There were hints, however, that the big market-makers were becoming increasingly reluctant to make aggressive prices in large sizes because of the extreme volatility in stock markets.
Turnover remained at relatively high levels, reaching 975 million by 6 p.m., well ahead of Monday's 805.9 million. Customer business on Monday was valued at £3 billion.
