Footsie recovers some lost ground as US anxieties ebb

London stocks staged a powerful rally yesterday, recouping well over half of the ground lost on Monday. The threat of a rise in US interest rates after the next meeting of the Federal Reserve's open market committee was watered down.

The change of heart affecting London stocks came mainly from the US, where one of the influential newspapers published a story that a rise in US rates was not as clear cut as indicated the day before by another US publication.

London's market-makers welcomed the apparent change of heart across Europe concerning US interest rate policy and drove share prices sharply higher. They said the rate stories had been overplayed and markets would have to wait for more evidence about US economic trends before judgement could be made.

But other traders insisted global markets would react more to valuation fundamentals than economics. They said London and Wall Street were both in dangerously high territory and a further decline by both markets was imminent.

"London is flying around and you have to feel that the euphoria can't last. We've been hoisted today by programme trades on the buy side, but I don't feel there is a lot more behind those," said a senior market-maker at one of the big international broking houses.

There were suggestions by dealers that some of the aggressive buying in the market could well have come from the "big four" British fund management groups that have underperformed the main market indices over the past year and more.

Sentiment in London was only marginally dented by rather disappointing trade figures and another bearish survey of industrial trends carried out by the Confederation of British Industry, which said exporters' confidence was at its lowest ebb for 18 years. At the close, the FTSE 100 had rallied 84.2 at 5,806.6, having hit a day's peak of 5,823.4, up more than 100 points, an hour into the Wall Street trading session.

Overnight, Wall Street's Dow Jones Industrial Average fell over 220 points as the interest rate stories boiled up, hitting sentiment in both bond and equity markets. Yesterday saw the Dow come in sharply higher and approaching 100 points up as the better feeling on US interest rates stimulated an early injection of funds into the US market.

London's second-liners and small caps underperformed the leaders, with the FTSE 250 finishing 3.9 higher at 5,567.9 and the FTSE SmallCap up 1.9 at 2,628.5.

Leading stocks made progress from the outset with financial stocks, notably the big mortgage lenders, in the forefront of the advance on the view that the sector had been heavily oversold during recent sessions and now offered good value.

News from annual meetings held by Barclays and Northern Rock tended to encourage buyers of those shares, with the latter's comment that it was maintaining market share a strong bull point.

Turnover in equities totalled a rather disappointing 801 million shares by the 6 p.m. cut-off point.