FTSE extends gains after a bullish note boosts the banks

BRITAIN’S leading shares rose yesterday after politicians and central bankers moved to shore up market confidence in the debt-ravaged Eurozone, with the FTSE 100 index breaking above an eight-week technical downtrend.

The FTSE 100 ended up 2.1 per cent, or 110.52 points, at 5,337.54, extending the rally into a third straight day.

Fresh support from France and Germany for Greece overnight, as it looks to implement austerity cuts and secure fresh bailout funds, sparked early gains.

These were added to during the afternoon after the US Federal Reserve and other central banks agreed to conduct three-month US dollar loans to banks in the final quarter of 2011 to counter any funding squeeze.

The coordinated action was “an important short-term measure given the hazardous pace at which funding market conditions had been deteriorating in recent weeks”, said Michael Symonds, financials analyst at Daiwa Capital Markets.

British banks had not been under the same pressure as European peers looking to secure dollar funding, but would nonetheless benefit from the improved counterparty lending environment within the Eurozone, he said.

Lenders were among those adding most points to the FTSE 100 index, with Lloyds Banking Group the standout gainer, up 7.2 per cent in volume about 1.5 times its 90-day average.

Other lenders including Standard Chartered, Barclays and HSBC rose strongly, by around four per cent, and the sector was also supported by a bullish Nomura note.

Banks were “discounting forced dilutive capital raisings and/or hits to book value from increased impairments”, the broker said, and though it did not rule out capital raisings, it believed they would grow capital ratios organically.

While the central bank action gave a boost to lenders, it did little to address the broader concern of bank solvency and debt sustainability, Symonds said.

“This is about central banks buying time for politicians to hopefully allow them to get ahead of the sovereign crisis.”

In addition to fresh support from France and Germany overnight, the European Union’s top economic official said international lenders would likely green light the next tranche of aid to Athens.

While equity markets used the news as an excuse to move higher, Greek credit default swaps still showed more than a 90 percent chance that Greece could default, according to Reuters calculations of Markit data.

The day’s gain left the market just below an intermediate peak, from 8 September, at 5,369.82 which was important, Bill McNamara, technical analyst at Charles Stanley said.

“It also roughly coincides with the intermediate highs that were hit in the middle of August. So there is a chance of a bit of residual resistance at current levels or slightly higher, at about 5,380.”

If that level was exceeded, the next logical move would be for it to test the 1 September high “when it came within spitting distance of 5,450”, while a 61.8 per cent Fibonnacci retracement from the July high to the August low would then leave a target of 5,600.

“That level is reinforced as a key point for the FTSE as it was critical low for the FTSE back in March,” McNamara said.