Evidence of a slowdown in British services, an area said to have been causing inflationary concerns at the Bank of England, provided a much-needed boost to London's equity market yesterday.
The Chartered Institute of Purchasing and Supply survey was interpreted by the market as virtually dispelling any lingering worries that British interest rates might be increased by the Bank's monetary policy committee. The result of the committee's meeting will be announced at midday today.
There were other reasons for the return of confidence yesterday. Wall Street was only modestly lower overnight and most Asian markets delivered comforting performances, especially Hong Kong, which rallied 2.5 per cent.
And US stocks made modest progress at the start of trading in New York yesterday, shrugging aside worries about tomorrow's May non-farm payroll report.
The FTSE 100 index finished the day 56.1 higher at 5,898.4, having hit a session-high of 5,913.6 minutes before Wall Street opened.
There was growing excitement on the FTSE 250 trading desks as the index representing the second-liners moved to within 0.2 of its previous intra-day and closing record, eventually finishing 22.8 higher at 5,920.4.
Although some distance from its previous records, the FTSE SmallCap index moved up 6.6 to 2,769.1.
London's rally came as no surprise to some strategists. Mr Mark Howdle, European strategist at Salomon Smith Barney, pointed out that, since March, the British market had underperformed the rest of Europe by 10 per cent. Salomon has underweighted the British market since initiating European strategy coverage in March. "We now see an opportunity to make a tactical switch and overweight the UK." Salomon qualifies its shift by saying it expects British interest rates to fall and sterling to continue to weaken.
Mr Howdle said: "The UK looks the low-risk market of Europe at present. While other important factors, such as demand for equities, merger and acquisitions activity and earnings momentum still favour continental Europe over the UK medium-term, we see the UK clawing back some of its recent underperformance over the next few months." Salomon introduced BPB and Lloyds TSB to its model European portfolio, instead of Akzo Nobel and ING.
On the technical side, chartists at Merrill Lynch said any break below the FTSE 100's 5,700 support level "would signal a further decline in following weeks, extending to 5,300". Merrill said that, unless the Dow Jones Industrial Average moved back above 9,000 in the next couple of days, the risk in the US was a further 510 per cent slide - ie retracements to 8,500-8,100.
Mr Richard Lake, chartist at Brewin Dolphin, the broker, said: "My short-term target area of 5,500 to 5,700 for the FTSE 100 is becoming much more likely; Wall Street turned bearish last week."
Turnover in equities expanded again, reaching 920 million shares at 6 p.m., boosted by big technical activity in Shell and after ABN Amro moved into the stock market to buy Courtaulds shares on behalf of bidder Akzo Nobel.
