German Chancellor Angela Merkel’s comments that her country stood ready to use the existing instruments already created in the Eurozone to combat the debt crisis also helped investors to stay positive despite the gathering crisis in Spain.
Sectors, whose fate is linked with economic conditions, made solid gains, with the UK banking index, miners and energy shares up 1.5 to 2.5 per cent.
However, investors hungry for hints of more stimulus from central banks were disappointed as the Bank of England left its policy unchanged and US Federal Reserve chairman Ben Bernanke offered little to suggest that further monetary stimulus was imminent.
The FTSE 100 lost some shine in late trading and closed below a session high because a lot of investors had positioned for some support from the Fed and the Bank. But it was still up 63.68 points, or 1.2 per cent, at 5,447.79 points, helped by China’s move to cut interest rates by 25 basis points.
“The rate cut from China shows their ability to continue pulling the relevant levers to keep GDP on an expansionary path and the rhetoric coming from the European Central Bank regarding the future of Spain shows the Eurozone isn’t set to break up any time soon,” said Mike Jarman, chief strategist at H2O Markets.
“For the short term, we’re advising clients to have more of a ‘risk on’ mentality, but know the volatility is here to stay.”
After the close, Fitch cut Spain's credit rating by three notches to BBB.
China’s rate cut to shore up slackening economic growth was the first since the depths of the 2008/09 financial crisis. The consensus view had been that the central bank would refrain from an outright cut to interest rates in 2012.
The market also got some support from a UK survey showing May’s services purchasing managers’ index (PMI) unexpectedly held firm at April’s level of 53.3, showing moderate growth. The British Retail Consortium reported a stronger-than-expected 3.4 per cent annual rise in the value of retail sales.
Yesterday’s finish for the FTSE 100 index was the highest closing since mid-May, a move which looked impressive given the fact that the market had slipped to a six-month low just last week on Eurozone jitters, deteriorating economic numbers and Spain’s banking sector woes.
“Risk sentiment has improved dramatically in the past few days as hopes of an EU deal to recapitalise Spain’s banks has attracted buyers back to equities,” said Angus Campbell, head of market analysis at Capital Spreads.
Societe Generale said a monetary policy intervention, progress towards a European banking union, a victory of moderate parties at Greek elections and signs of economic recovery could trigger a rebound. It highlighted “high beta assets”, which tend to offer higher returns than the broader market during rallies and fall more sharply during corrections.
RBS jumped 5.3 per cent yesterday, Barclays was 2.7 per cent higher and Kazakhmys advanced 1.9 per cent.
Among other movers, Johnson Matthey rose 4.9 per cent after the world’s largest supplier of catalytic converters reported better-than-expected results, while Burberry rose 5.1 per cent as Credit Suisse upgraded its rating on the luxury goods firm to “outperform” from “neutral”.