Buying spree by European investors drives bull market to higher ground

The new year bull market shows no signs of slackening after stock markets around the world powered ahead - most to new highs - with demand for financial and telecom shares the driving force. The Irish stock market may have stopped short of breaking its high of last April, but with the ISEQ Overall Index up over 4 per cent yesterday and almost 8 per cent since the turn of the year dealers believe that the 5,471 record reached last April for the ISEQ will be broken before the end of the week.

The domestic market was boosted by continued gains on continental markets, a three per cent rise in London and a roaring bull market in New York where the Dow Jones index was heading towards the 9,500 level as European markets closed.

Once again, huge demand for the two big banks from European investors was the dominant feature of yesterday's trading. But dealers said that there were signs that the demand has now extended to other financial and industrial shares despite fears that the advent of the euro would see a disengagement from Irish stocks. The banks are being driven ahead by European institutional buying which bases asset allocation on the composition of the main European stock indices. AIB's presence in the Dow Jones Eurostoxx 50 and Eurotop indices is a major factor in the 14 per cent increase in AIB shares since the beginning of the year.

Bank of Ireland is in the Eurotop index and is now up almost 11 per cent while other financial shares have benefited from a spill-over of interest from the two big banks. Anglo Irish Bank, Irish Life, Irish Permanent and First Active all made more gains yesterday and were well-bid at the close.

Dealers said that as well as index-buying of two banks, the economic argument is attracting overseas investors into the financial sector in general. The extraordinary exchequer surplus announced on Tuesday has led some economists to upgrade their 1999 forecasts for gross domestic product growth to 10 per cent. Banks and other financial institutions are one of the main beneficiaries of economic growth of this scale.

In London the FTSE index soared to within a whisker of its all-time peak yesterday as mounting speculation of mega-mergers and surging US share prices combined with increasing pressure on the Bank of England to reduce UK interest rates towards euro zone levels.

At the close, the "Footsie" had marked up a 190.5 point rise to 6,148.7 where it is well placed to scale its record level of 6,179 reached last July. The fresh surged in London share prices coincided with the start monthly two-day meeting of the Bank of England's Monetary Policy Committee (MPC) that is considering whether to cut UK interest rates for the fourth successive month.

After last month's larger-than-expected 0.5 per cent cut to 6.25 per cent, most City analysts believe it will opt to leave rates unchanged until fresh statistics provide new pointers towards the direction of the economy and inflation in the months to come.

So far, sterling has been relatively unscathed from this week's launch of the euro. After dropping three pfennigs against the deutschmark earlier in the week, the British currency recovered nearly one pfennig to DM2.7629 yesterday.

Even so, MPC members may well feel that further reductions in UK interest rates should be postponed until they are in a better position to assess the future for sterling's outside the new "euro". However, pressure for further rate cuts are intensifying not just from cries of pain from manufacturing industry suffering from falling orders and output.