FTSE rallies after ECB’s bond buying plan boosts investors’ confidence

MINERS and banks led the rebound on Britain’s FTSE 100 yesterday, after investors gave an initial thumbs up to ECB president Mario Draghi’s bond buying plans, while strong US data also helped lift sentiment.

The FTSE 100 100 closed up 119.48 points, or 2.1 per cent, at 5777.34 as the index recovered losses sustained over the previous two sessions.

The index rallied after the European Central Bank (ECB) agreed to launch a new and potentially unlimited bond-buying programme to lower struggling Eurozone countries’ borrowing costs and draw a line under the debt crisis.

“The announcement was pretty much as expected so I am a little surprised at the rally we are seeing, but investors were looking for a catch and there has not been any thus far and the market has taken it well,” Barclays European equity strategist Edmund Shing said.

Volumes spiked – 137 per cent of their albeit weak 90-day average – after Draghi finished his speech as investors piled in keen not miss out on the risk-on trade.

UK banks rallied 3.6 per cent and miners gained too, up 4.1 per cent, with traders citing an element of short covering after the broader blue chip index shed around three per cent in the run up to Draghi’s speech.

Barclay’s Shing said with the plans limiting downside risk to the Eurozone debt crisis investors were playing the move by the ECB via financials.

Investors will now turn their attention to a German constitutional court ruling on the Eurozone’s permanent bailout fund on 12 September, which may affect the ECB’s bond-buying plans.

“It is all very well we have this unlimited bond buying plan at the short-end, but are investors absolutely sure that Spain are going to demand assistance on 16 September and that there will be no hiccups on 12 September,” Barclay’s Shing said.

Bullish economic data and a strong start on Wall Street boosted sentiment too after the world’s biggest economy showed the pace of growth in the massive services sector rose in August on the back of a rebound in employment and exports.

“ADP payrolls came in much higher than expected and raised expectations for a good non-farm payroll number tomorrow,” a London-based trader said.

Among the top gainers on London’s blue chip index were Lloyds Banking Group, which climbed 6.7 per cent, while miner Randgold Resources added 5.3 per cent.

JPMorgan said it expected Randgold and others of its gold mining picks to outperform the gold price on a 12-month basis.

Leisure group Whitbread rose 5.3 per cent after the Olympics and wet weather helped generate business for the firm this summer. The London games boosted room rates at its Premier Inn chain while more shoppers sheltered in Costa Coffee shops, raising second-quarter like-for-like sales by 4.2 per cent

Panmure Gordon raised its target price on Whitbread, while Shore Capital called the update “very strong” and said risks “continue to appear weighted to the upside” for the firm.

Investors also cheered results from Britain’s fourth-largest grocer Wm Morrison, which gained 4.3 per cent after first-half profit hit the top end of forecasts and it said it was on track to meet its expectations for the year.

Events in Frankfurt overshadowed a policy decision by the Bank of England, which stuck to its current policy of government bond purchases as Britain’s recession appears to be easing.

The Bank of England yesterday also left its interest rate unchanged at a record low of 0.5 per cent.