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Leading shares rallied from opening falls today, climbing back above the 4700 level, after the Governor of the Bank of England, Mervyn King, moved to reassure stock-market investors that cheap money would be swilling around the economy for some time to come.
He confounded City pundits who had been forecasting that the next move in rates would be upward before the year end.
Not so, says the Guv'nor in his latest inflation report. He warns the inflation rate will come in well below the 2% target set by the Government in two years if interest rates rise during the first quarter. That may have also been behind the monetary policy committee's decision to pump a further £50 billion of quantitative easing into the system last week, thereby raising the total to £175 billion.
But King also warned that while the next few quarters may start to show tentative signs of a return to growth in the GDP, the recovery will be slow and painful. That view was backed up by the latest unemployment numbers showing 220,000 people had lost their jobs during June. That increased the total to 2.45 million and looks to be on target for a year-end figure of three million.
Shares recovered from an early sell-off ahead of the decision on US interest rates by the Federal Reserve Open Market committee tonight. The FTSE 100 sported a rise of 45.4 at 4716.8 after briefly touching a low for the day of 4671.3. It had been held back by the long list of companies going ex-dividend, the equivalent of a 9.5 fall.
The US trade gap widened in June but that did not stop Wall Street posting opening gains this afternoon on the back of a revived banking sector. The Dow Jones rose 116.6 to 9358.0.
Banks shrugged off early falls, including Lloyds Banking Group, which rallied 6.1p to 97.1p, after selling its Insight asset management business to Bank of New York Mellon for £235 million. Shares in the lender have fallen around 10% since the start of the week, weighed down by talk of a possible £16 billion rights issue. Lloyds wants to avoid joining the Government's Asset Protection Scheme because the premiums are too expensive. Barclays put on 8.2p at 354.6p and Royal Bank of Scotland 2.2p at 45.1p. HSBC was the exception, falling 3.4p to 651.4p, reflecting big falls overnight in Asia.
The speculators are looking to the life assurance sector to provide the market with a further boost now Friends Provident, 3p firmer at 76p, has agreed to the improved terms from Clive Cowdery's Resolution. Gossip in the Square Mile claims Resolution will now turn its guns on Legal & General, which rose 2.95p to 65.9p.
Those investors that chose to test the water could hardly claim to be adventurous. They came in for defensive stocks, such as Imperial Tobacco, up 40p at 1717p, and AstraZeneca, 34p dearer at 2812½p, and utilities such as United Utilities, 4.3p up at 452.4p, and Severn Trent 18½p higher at 974p.
A new round of consolidation among the mining companies appears to be on the cards after the world's biggest miner said it was on the lookout for suitable acquisitions following a 51% slump in profits.
BHP Billiton, which failed in its attempted £90 billion takeover of Rio Tinto two years ago, advanced 26½p to 1554½p despite warning it did not expect to see a big surge in commodity prices on the back of global economic revival. BHP has drawn up plans to form a joint iron ore venture with its former bid target. But Rio fell 5½p to 2300p after the Chinese authorities arrested four members of Rio's staff on charges of commercial spying.
Irish explorer Emerald Energy stood out with a leap of 62p to 737p after agreeing the terms of a 750p-a-share offer from China's Sinochem. The deal values the oil and gas explorer with interests in Colombia and Syria at £532 million.
The deal has the backing of Russian investor Michael Kroupeev, who holds 30% of the shares.
Dana Petroleum, up 12p at 1381p, remains a firm favourite among City speculators, who are convinced it will eventually be bid for by the Indian Oil Corporation. Now Deutsche Bank has jacked up its target from 1350p to 1625p, while rival Nomura has trimmed by 25p to 1530p.
BG Group was one of the better performances among blue-chips, climbing 40½p to 1025p. ING has raised its rating from sell to hold because it reckons the shares are looking cheap.
Explorer Bowleven jumped 9¼p to 90½p after agreeing to a $100 million farm-out deal with the energy trading company Vitol Group on the Etinde Permit in Cameroon.
