The benchmark FTSE 100 index closed up 125.87 points or 2.4 per cent at 5,394.53, on the final trading day in August.
The index, however, was down 7.2 per cent on the month in which the US lost its triple-A credit rating. Without the final day surge, August could have been the FTSE’s worst month since the collapse of Lehman Brothers in 2008.
Throughout August, worries over the health of the global economic recovery and the lack of unity shown by governments worldwide in tackling the slowdown have dented investor appetite for riskier assets such as equities.
“With fiscal policy nowhere, investment bankers are being forced to take on the role of sorting out the economy because politicians can’t,” said Louise Cooper, markets analyst at BGC Partners.
Yesterday’s economic data continued to fall foul of market expectations as UK consumer confidence fell to its lowest level in four months in August.
Analysts at Exane BNP Paribas became the latest to cut their world GDP forecasts, reducing global growth estimates to just 3.8 per cent for 2011 and 3.7 per cent for 2012.
The troubling data and downgrades are concerning policymakers and the minutes released on Tuesday from the most recent Fed board meeting indicated several policymakers backed further monetary easing to support growth.
“What we learned from the minutes was that ‘a few members’ had wanted even more aggressive action at the August meeting, but accepted the language change as a ‘measured’ step in that direction,” analysts at RBS said.
Further quantitative easing would likely lead to lower interest rates for longer, which tends to spur lending, spending and economic expansion.
Lower rates also suppresses appetite for other asset classes such as cash and bonds, and fuel demand for riskier assets such as equities, with smashed down mining and oil and gas shares being picked up on the cheap.
Thomson Reuters Datastream showed the FTSE 100 carrying a one-year forward price-to-earnings of 9.9, against a 10-year average of 14.1.
Commodities trader Glencore rose 5.5 per cent, while global miner Xstrata added 5.2 per cent.
Building supplies firm Wolseley climbed five per cent in light volumes as Exane BNP Paribas raised its rating on the firm to “outperform” on valuation grounds, but in the same note cut its rating and earnings estimates on the European building materials sector on concerns over slowing growth.
Elsewhere, Smith & Nephew, the maker of artificial knees and hips, rose 4.9 per cent, as long-standing bid talk was reheated with US rivals Stryker Corp and Biomet mentioned in press reports as potential suitors.
On the downside, British Land shed 0.9 per cent after double-downgrades for both by Morgan Stanley in a cautious review of the European real estate sector.
Schroders dropped as Citigroup downgraded its rating for the firm to “hold” from “buy”.