Britain's top shares surged 3.5 percent higher on Tuesday as the prospect of a hefty US rate cut and forecast-beating results from Lehman Brothers and Goldman Sachs calmed shaken investors. The FTSE 100 leading share index ended up 191.4 points at 5,605.8.
The index sank 3.9 percent on Monday, hitting its lowest closing level since late 2005, as the fire sale of US investment bank Bear Stearns to J.P. Morgan Chase sparked fears more banks may fall victim to the credit crisis.
UK banks, which took a whipping the previous day, all rose and together added 59 points to the FTSE 100. Alliance & Leicester leapt 8.4 percent, Standard Chartered added 7.5 percent and HSBC rose 7.2 percent. Wall Street also staged a stellar rally, with shares in Goldman and Lehman leading a rebound in financial stocks.
Nearly all US primary dealers now believe that the Federal Reserve (Fed) will cut key short-term rates by at least three-quarters of a percentage point later on Tuesday. US rates currently stand at 3 percent. Seven of the 20 Wall Street firms which do business directly with the Fed predict the central bank will lower rates a full point to 2.00 percent, which would be the steepest Fed cut in more than 25 years.
"The fact that the authorities are waking up to what they have to do does at least allay some fears and sow the seeds for a recovery in due course," said Jeremy Batstone-Carr, head of private client research at Charles Stanley.
Hedge fund Man Group surged 9 percent, rebounding from a 10 percent drop in the previous session when its 18.6-percent-held affiliate MF Global dived more than 60 percent on speculation the broker of exchange-listed futures and options may have liquidity problems.
Citi said in a note that the slide in Man Group shares presented a buying opportunity. Insurers joined the party. Aviva was up 6.8 percent and Prudential rose 6.3 percent. Legal & General reversed earlier falls, ending 3 percent higher despite saying its 2007 profit fell 26 percent, missing analysts' expectations after making a 269 million pound charge to account for Britons living longer.
Mining shares also forged higher, supported by stronger copper prices. Rio Tinto added 4.2 percent, supported by news that Chinalco, the Chinese metals company that led a stunning $14 billion investment in Rio, could raise its stake in the global mining firm and has no intention of cutting back on its ambitions elsewhere.
Europe's biggest travel firm TUI Travel added 7.5 percent after it said its key summer holiday bookings remained strong across the group and it was on track to hit 2008 profit forecasts and merger cost-saving targets.
Drugmaker Shire rose more than 6 percent after UBS issued a report saying AstraZeneca could afford to pay 1,425 pence per share for Shire. Shire has risen sharply in the past two sessions on market talk of a possible bid from Pfizer. AstraZeneca shares gained 2.4 percent and GlaxoSmithKline rose 3.7 percent.
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