Miners rose 5.6 per cent, contributing 34 points to the UK benchmark, as China’s manufacturing sector showed expansion for the first time in three months, easing worries of an abrupt slowdown in the world's second-largest economy and top metal consumer.
Miners Kazakhmys, Lonmin, Antofagasta and Rio Tinto were the top four gainers, up between 7.1 and eight per cent.
Expectations that Eurozone leaders will announce a comprehensive plan to tackle the two-year-old debt crisis at tomorrow’s summit also boosted the index.
However, some traders said the market was running ahead of the news and that any disappointment would lead to a sharp sell-off.
“The market is no more than going to a casino,” Securequity trader Jawaid Afsar said, adding that he was keeping a “neutral” position.
The FTSE 100 ended up 59.41 points, or 1.1 per cent, at 5,548.06 in relatively light volume after rising 1.9 per cent in the previous session.
Despite the rally yesterday, UK miners are still down 26.5 per cent in the year to date, hurt by the weakening global growth outlook.
Michael O’Sullivan, director of global asset allocation at Credit Suisse Private Banking, said miners were cheap and that his bank was overweight on the sector, which would be benefited by more M&A activity.
“Supply is constrained, so to be able to buy supply is important. Lots of the big mining companies have a lot of cash to undertake acquisitions,” O’Sullivan said.
But he said the sector’s performance would also depend on the situation in Europe and China’s financial sector, which investors are concerned is saddled with problem loans after Beijing's stimulus drive after the collapse of Lehman Brothers in 2008.
UK banks advanced 2.5 per cent yesterday, outpacing a 1.3 per cent rise in Eurozone banks, as policymakers in the currency bloc worked on a wider solution to the debt crisis ahead of tomorrow’s deadline.
Evolution Securities analyst Ian Gordon said investors should recognise that UK banks substantially share Nordic banks’ defensive qualities against a European sector that is preparing to drown in new equity issuance.
Lloyds Banking Group climbed 5.3 per cent. The bank said on Sunday that a flotation of 632 branches, which it has been ordered to dispose by regulators, remained an option, along with a sale of the branches.
The FTSE 100 has so far fared better than peers in continental Europe this year, down six per cent, as British companies are seen to be less affected by the two-year-old sovereign debt crisis. Germany’s DAX has shed 12.4 per cent.
“We have been more bullish on the UK slightly, relative to Europe. That has worked. But we are obviously aware that if you do get a positive surprise from the politicians, that will start to unwind,” said Nick Nelson, European equity strategist at UBS.
FTSE 100 companies are expected to post average year-on-year earnings growth of 16.2 per cent for 2011 and 10.8 per cent for 2012, against a decline of 1.5 per cent for DAX firms this year and a 9.4 per cent increase next year, Reuters data showed.