Rate-cut hopes spark cautious Footsie rally

Hard-pressed financials led the charge today as stock-market investors pinned their hopes on an early and sizeable cut in interest rates.

Fresh evidence from the Ernst & Young ITEM Club that the housing sector remains in a slump has increased pressure for urgent action by the Bank of England monetary policy committee to cut rates. Some are calling for a steady reduction in rates from their current level of 4.5% to as low as 1%.

As a result, City investors were galvanised, driving the FTSE 100 index 197.4 points, or 5%, higher to 4123.8.

Even so, turnover levels failed to reflect the performance of the benchmark index. By midday just 635 million shares had changed hands. That is hardly the stuff sustained bull markets are made of.

London's performance proved more pedestrian than that of New York, which last night had enjoyed a record-breaking points rise, with the Dow climbing almost 900 points, or 11%. There were few reasons for Wall Street's performance apart from Asia's turnaround yesterday and a softening of money-market rates.

The speed of the rally would suggest it had been fuelled by stock shortages and a desire to give the bears a good, old-fashioned squeeze. But there are grounds for optimism, with the Federal Reserve forecast to cut US interest rates tonight. That would coincide with the release of the US GDP, which is not expected to make pleasant reading.

Back in the Square Mile, financials took the opportunity to recoup some of their recent losses. Among the best performers were life assurer Old Mutual, up 10.9p at 49.9p, and Royal Bank of Scotland, 7p ahead at 63.8p. Another life insurer, Aviva, continued to build on yesterday's better-than-expected third-quarter numbers with a rise of 68p, or 26%, to 327p on meagre turnover of just six million shares. Dealers described these sort of price movements as "unrealistic".
Rival Prudential also managed to shrug off recent weakness to post a rise of 29½p at 277¾p, while Man Group, the UK's largest hedge-fund manager, put on 32½p at 332p.

Despite assurances from Standard Chartered, up 138p at 838p, that it does not need to tap shareholders for more cash, Citigroup has dropped its target for the shares from 750p to 650p. Meanwhile, Credit Suisse has downgraded its rating on the global banking group from outperform to neutral, slashing its target from 1600p to 1000p. With some catching up to do, Collins Stewart has dropped its target from 1968p to 1265p.

Citigroup says yesterday's trading update indicated consumer banking revenue had fallen during the third quarter, with the wealth management division the main area of weakness.
"With weaker loan growth likely to persist as Asian economies slow, the compound effect on earnings becomes significant," the broker concludes.

One sector expected to benefit from a cut in interest rates are the pub-chain operators. Many of them are burdened with debt and suffering from falling sales. Enterprise Inns rose 9p to 86¾p with JD Wetherspoon adding 12p at 241½p, Greene King 16½p at 310¾p and Punch Taverns 17¼p at 123½p.

Bombed-out housebuilders would also benefit from the lurch towards cheaper money. It might go some way to reviving the housing market and take some of the pressure off their overstretched balance sheets.

Taylor Wimpey, up 1.35p at 10¼p, has debts totalling £1.7 billion. That compares with its stock-market price tag of just £94 million. Also in the sector, Bellway rose 54¾p to 476½p, while Persimmon put on 26p at 240½p.

Morgan Stanley has cut its target on Drax, up 15p at 559½p, from 675p to 625p, and forecasts "choppy waters in the coming months".

It says this will be brought on by the weaker environment for commodities and an easing in the tight UK power market.