Friday 19 September - afternoon update

A surprise crackdown on speculators and the promise of a wide-reaching solution to the crisis in the US financial sector triggered an unprecedented rally among leading shares with the FTSE 100, up almost 400 points, heading for its biggest ever one-day rise.

The dawn of a new regulatory environment, where the short-selling of a clutch of crucial financial stocks is banned, sent some financial stocks soaring by up to 80% at the open as confusion reigned and investors scrambled to close short positions.

For once, hedge funds and other short-sellers were at the mercy of market makers who, judging from the share movements, were able to name their prices.

Later, when the initial panic had subsided, the impact of the ban could clearly be seen. Nine of the top 10 risers on the Footsie leader board were on the list of 29 companies in which shorting will be banned and each posted a rise of 20% or more.

Royal Bank of Scotland was 61.2p higher at 223p, a jump of 38%, while HBOS was up 54.65p at 227.25p, a move of 32%. The stunning rise in HBOS prompted speculation that had the FSA moved a couple of weeks earlier, HBOS might have retained its independence. Even now it is possible that shareholders might start agitating for a better deal. However, a 50p rise for Lloyds TSB to 288p means its rescue offer is now worth 239p per HBOS share, some way north of the current price.

Standard & Poor's today downgraded HBOS to sell from hold following the Lloyds rescue plan. It reckons that, while the deal will go through, “the terms announced do not resolve the medium-term wholesale finding issues that have affected HBOS.” It has slashed its target to 166p from 360p on the “likelihood of further asset writedowns and a takeover at a discount to net asset value.”

Overall, the FTSE 100 was up 389.8 points at 5269.8, or 7.99%, beating the 7.89% posted in October 1987 in the aftermath of Black Monday.

Outside the blue-chips struggling newspaper group Trinity Mirror led the second tier, leaping 29.5p to 116p, up 34% The FTSE 250 mid-cap index soared 630.1 to 8966.6, a rise of 7.5%.

On Wall Street this afternoon, relieved investors appeared to be pushing American shares to a second consecutive day of spectacular recovery with the Dow Jones up 310.5 to 11,3330.2.

The strength of the London rally took brokers by surprise. The latest statistics show that only 4.7% of the FTSE 100 is out on loan at the moment.

Much of the buying, brokers said, could be attributed to long-term investors coming back into the market in response to decisive action on both sides of the Atlantic to restore stability in the financial system.

HSBC, up 80.2p at 876.5p, has pulled out of a deal to buy a controlling stake in Korea Exchange Bank from American private-equity fund Lone Star Funds, citing plunging asset values as a reason. It had been about to offer $6.3 billion for a 51% stake.

The word is HSBC is holding its firepower back in order to bag a bargain on Wall Street.

In Dublin, Bank of Ireland soared 65% on rumours that Spain's Banco Santander may make an offer. Despite a blunt denial the Irish bank remained resolutely higher.

Just a handful of top names failed to make headway in the relief rally. Cyclical favourite BAT dropped 15p to 1815p while utility groups Severn Trent, 9p off at 1379p, and Centrica, 0.5p lower at 319p, were also cold-shouldered.

British Airways, was up 4p at 2271 despite Citi analyst Andre Light pointing out that the banking sector generates around 10% of BA's total revenue and job losses will hit leisure travel too. He has cut his target for BA to 330p from 350p in the light of expected lower earnings and pension pressure but remains a fan.