An uneasy opening by London stocks quickly gave way to a fresh burst of strength yesterday, enabling the FTSE 100 Index to recoup all of Tuesday's hefty losses and driving the All-Share up to a new closing record of 2,383.98, up 19.1.
London's latest upward move took many traders by surprise and was mainly driven by the derivatives market where the FTSE future moved to a premium to fair value, pulling the cash market up with it.
Sentiment was given a substantial boost in the afternoon by the agreed £9 billion sterling bid for Salomon Brothers, the US broker, from Travelers.
Wall Street opened on a strong note, with the Dow Jones Industrial Average driving through the 8,000 level. There was also keen buying of UK banking stocks on hopes of more mergers in global banking and financial stocks.
Footsie began the session marginally lower, but gradually began to make progress, led by the futures, moving into positive ground within 30 minutes of the opening and pushing up to finish at the day's high of 5,077.2, up 49.7 and less than 10 points below its previous closing high.
Second-line stocks fared less well, but still managed to record good gains. The FTSE Mid-250 posted a 13-point advance to 4,722.9, only 6.5 short of its record close, reached on March 11th. The FTSE SmallCap Index rose 4.8 to 2,304.8, still well shy of its March 12th record close of 2,374.2.
There was no initial help for UK equities from the US overnight, where the Dow dipped 26 points and US Treasuries lost around half a point. And gilts only managed to move into positive ground late in the session, ahead of this morning's auction of £1.5 billion-worth of 25-year stock.
NatWest Securities' strategy team lifted its Footsie targets for end-1997 and 1998; its end-1997 figure is lifted by 200 points to 4,800, while that for end-1998 is raised from 5,100 to 5,700, with a 12-month target of 5,600.
NatWest said it remained nervous about financial markets in the short term. But it cited three positive developments; the narrowing of gilt spreads following better-than-expected PSBR data and evidence that the economy was not overheating; a results season that has not produced a rash of profit downgrades; and evidence that the net supply of equities would remain modest for the foreseeable future.
BZW, which last month shifted its stance on the UK from underweight to neutral, said it is "looking to upgrade the market further", although it cautioned that "the evidence to back such a view still seems a little light".
The investment bank added "there is quite a good chance that the next move in base rates will be down rather than up and the possibility of EMU membership not too long after 1999 looks tantalising".
Meanwhile, MeesPierson, the Dutch group, said it is closing its UK securities business at the end of October - a move seen by many as the first casualty of next month's shift to order-driven trading.
