AIN’S benchmark share index rose to a three-week high yesterday, boosted by expectations of stimulus action from the US Federal Reserve, prospects of renewed merger and acquisition activity and a brightening technical picture.
After the close of the UK market, the Fed was widely expected to unveil a third round of quantitative easing for the US economy, an increasingly important market for UK corporates when much of Europe is in recession.
Expectations of action by the Fed plus the European Central Bank’s plans unveiled last week to buy sovereign bonds to support the Eurozone’s weak economies, have helped push the FTSE 100 index above the psychologically important 5,800 mark, opening the door to more gains.
“For now the market wants to go up and it's got every reason to go up ... As long as these weak numbers keep coming out, you know that QE3 is round the corner,” said Steve Larkins, head of sales trading Seymour Pierce.
“But ... (if the market goes) too far, too soon on too little volume, it won’t sustain it.”
The FTSE 100 gained 37.84 points, or 0.7 per cent to 5,819.92 points, closing above its 20- and 30-day moving averages and notching up its best daily finish since 21 August.
Technical strategists said the charts for the index were starting to look more positive, but for the outlook to be clearly bright the index would need to break above its August peak of 5,873 points.
Rolls Royce was the top gainer, up 3.1 per cent, as news of a planned tie-up between BAE Systems and Airbus owner EADS raised expectations of merger and acquisition activity in the sector.
BAE, itself however, dropped 7.3 per cent, erasing much of a jump seen late on Wednesday when the deal first emerged. EADS fell 10 per cent in Paris.
“Although attractive for BAE, we believe that EADS shareholders would vote against this proposal ... This is a good opportunity to take profits in BAE and reiterate our “sell” recommendation," strategists at Societe Generale said in a note.
The FTSE 100 is now up some 11 per cent from its early June trough and some strategists cautioned against pushing the market too much higher while the economic picture remains dreary despite all the stimulus noises from global central banks.
Yesterday offered further proof of that, with British clothing retailer Next saying that sales in August and early September have been disappointing.
Shares in Next dropped 7.2 per cent, helping push the retail sector 2.3 per cent lower.
“We’ve avoided the retailing sector for quite a long while,” said Edward Bland, head of research at Duncan Lawrie Private Bank. “Next has been a very well managed company but even they can’t do anything about the retail background. If consumers are busy trying to reduce their overdrafts and their loans, and consumer spending is dull, then they can’t escape that fact.”
Meanwhile European stocks fell yesterday, taking a pause in their sharp three-month rally, as investors awaited to see if the Fed would unveil further stimulus measures which could further boost appetite for risky assets.
The Eurozone’s blue chip Euro STOXX 50 index ended 0.8 per cent lower at 2,543.22 points, retreating from a near-six month high hit in the previous session, while the FTSEurofirst 300 index of top European shares closed 0.2 per cent lower at 1,106.27 points. Eurozone banking stocks were among the top losers, with Societe Generale down 3.3 per cent and Banco Popolare down 1.8 per cent.