Relief at US Fed's decision on rates

LONDON'S equity market reacted with surprise and considerable enthusiasm to the US Federal Reserve's refusal to nudge interest rates higher.

The news, announced after British markets closed for business on Tuesday, saw the bears in London scramble to cover their short positions, driving share prices sharply higher.

There was further good news for equities from the outcome of the latest gilts auction, £3 billion sterling worth of long dated stock, which was covered a comfortable 1.73 times.

That news saw gilts pick up after an uncertain start and eventually close with good gains on balance. Gilts were additionally supported by a strong showing by US Treasury bonds, where the yield on the 30 year bond remained below 7 per cent.

Far from testing the 3,900 level, as many market observers had been fearing, the FT-SE 100 index began the session in good form and accelerated throughout the day, peaking shortly after Wall Street opened and closing a net 25.2 higher at 3,935.7.

The second-line stocks performed well but were left behind by the leaders, with the FT-SE Mid 250 finishing with a 14.9 gain at 4,403.1.

A further push for the market came with the revival of various takeover rumours, mostly in the financial sectors.

Market makers, relieved with the news on interest rates from Washington, adopted a much more bullish view of short term prospects for British stocks.

"Instead of wringing their hands about rate rises choking off the emerging pick up in consumer spending, the big institutions are now talking about the large amounts of cash in the market. And the takeover stories look much more attractive too," said one dealer.

He said the odds favoured the FT SE 100 taking another look at the 4,000 mark in the not too distant future "if Wall Street behaves itself".

The view among equity market strategists after the Fed meeting was generally one of surprise. "A 25 basis points rise would have cleared the air and not been too badly received either in the US or in Europe," said one strategist. He was slightly cautious about the response of European markets to the news. "The initial response to this sort of thing is not always the correct one," he added.

Another also pointed to the institutions' cash piles and said the appearance of any sizeable bids would see the market well on its way to 4,000.

But he was reluctant to get too enthusiastic about the FT SE 100 pushing much beyond that level, citing the potential for increasing political uncertainties as the general election gets ever nearer. "This side of the election, 4,000 on the Footsie looks increasingly like a good selling opportunity."

Turnover was seen as disappointing given the scale of the gains in the market, with the 6 p.m. reading showing 691.7 million shares as having changed hands. Customer trading on Tuesday was worth £1.4 billion sterling.