A favourable international background allowed the London stock market to regain some of the ground lost on Friday, as domestic news took a back seat to events in Japan and Russia.
The resignation of the Japanese Prime Minister, while treated with some caution in Asia, prompted widespread relief in Europe, on the assumption that a new government would be more committed to reform. Several continental bourses reached new highs.
The FTSE 100 index slipped slightly in early trading, hitting a low of 5,926.4, down 3.3. But it quickly joined in the European rally, reaching the day's high of 5,972.6, up 42.9, around lunchtime and ending 28.5 points higher at 5,958.2.
The blue chips led the way. The FTSE 250 index managed a more modest 9.2 increase to 5,638 but the SmallCap index again weakened, falling 2.3 to 2,576.6.
Gilts lost about a third of a point as the conclusion of a deal between the Interna tional Monetary Fund and Russia reduced investors' desire for "safe haven" bonds and increased their enthusiasm for equities.
The equity market highlight was the debut of Coca-Cola Beverages, which moved to a healthy premium and was responsible for more than a quarter of the day's volume.
Total turnover was 766.3 million shares by the 5 p.m. count, of which 64 per cent was in nonFootsie stocks. A glitch on Topic distorted the closing 6 p.m. figure.
The latest Merrill Lynch/ Gallup survey of UK fund managers found that they have turned more pessimistic about the domestic equity market, with sellers outnumbering buyers by 11 percentage points. They remain heavy buyers of gilts, with buyers predominating by 26 points.
However, the recent bearish tone in the market has not dismayed the more bullish analysts. The strategy team at Credit Suisse First Boston has cut its top-down earnings forecast from 7 per cent to 4 per cent for 1998. But CSFB is retaining its year-end Footsie forecast of 6,600.
"The year of strongest earnings growth for the equity earnings growth in the 1990s turned out to be the year of the worst performance - 1994," the investment bank points out.
Another group to take an optimistic view is Lehman Brothers, which is retaining its 6,400 year-end target.
"We think short rates have now peaked," says Mr Ian Scott, the UK strategist, adding that "there is already a significant degree of protection built into valuations. On the basis of our earnings yield gap model, the market is around 15 per cent below fair value (given unchanged bond yields and no change to current consensus earnings estimates). Put it another way, the market is discounting a 15 per cent reduction in forward earnings estimates."
