THE GrandMet Guinness merger, allied to another strong start on Wall Street, rescued what looked like being a dull day on the London stock market. The FTSE loo index rose for the tenth straight trading session to record yet another all time high of 4,669.6, up 38.7.
The market was caught by surprise by the £23.8 billion sterling merger shares in both companies had dropped on Friday. But it rewarded both participants with sharp rises in share prices, which were responsible for around 19 points of Footsie's gain.
There were other knock on effects for London stocks. The merged company plans to return £2.4 billion in cash to shareholders, which investors may well reinvest in the market. And the announcement of a mega merger sent investors scurrying to buy other potential takeover plays.
Furthermore, the merger bust shows that consolidation is taking place in the UK corporate sector and that will help earnings", said Mr Bob Semple, market strategist at NatWest Securities.
For a while, however, it looked as if the main effect of the deal would be to limit the London market's fall, as investors decided to take profits after the recent strong run. Bank shares were particular sufferers.
Sunday newspaper hints from Mr Gordon Brown, the Chancellor of the Exchequer, on plans to increase corporate taxation in the Budget also weighed on shares. At its worst, Footsie was down 8 at 4 622.9.
The rally really took hold in the afternoon - when Wall Street opened strongly, buoyed by inter est rate optimism and a rebound in technology stocks. The Dow was 72 points higher when the London market closed.
However, there were plenty of domestic supportive factors. The producer prices numbers showed that input prices (manufacturers' commodity costs) were down 10.5 per cent year on year. Input prices were much lower than expected," said Mr Simon Briscoe, an economist at Nikko Europe. "These numbers will reduce worries that the Bank of England will tighten rates aggressively over the next few months."
The prices data, together with soothing comments on inflation from Mr Eddie George, the governor of the Bank of England, created a supportive background for gilts. The benchmark 10 year issue rose by about a quarter of a point.
Gilt strength is one of the factors behind last week's decision by Lehman Brothers to raise its end year Footsie forecast from 4,600 to 5,000. Mr Ian Scott, UK strategist, says equities are 6 per cent undervalued relative to gilts and he believes that the Bank of England's freedom to set interest rates will lead to further falls in gilt yields. "Inflation expectations have already dropped by 40 basis points," he said.
Reports indicated that Meryll Lynch became the third broker to raise its end year forecast to 5,000 yesterday.
Volume was a respectable 762.8 million shares at the 6 p.m. count, of which around a tenth came in GrandMet and Guinness.
