FTSE rallies on hopes action is coming over Eurozone debt
BRITAINS’S top share index rallied yesterday as financial and basic resources stocks advanced, helped by hopes that Eurozone leaders were moving closer to action to stem a debt crisis in the region.
London’s blue chips added 148.11 points in its second consecutive day of gains after nine straight sessions of declines, as equities across Europe and the United States rose and yields on distressed Eurozone bonds declined.
The rally was triggered by an unsourced report in Italian daily La Stampa, which suggested the International Monetary Fund was preparing a rescue plan for Italy worth up to €600bn (£515.5bn). This was later dismissed by an IMF spokesperson.
“[The FTSE] is coming off oversold level and given the denial of rumours that the IMF was going to get involved, I’m a little bit surprised with the strength of the rebound,” Gerard Lane, investment strategist at Shore Capital, said.
London’s blue chip gauge broke through the 38.2 per cent Fibonacci retracement of the July high to August low, as it extended a bounce after closing above the 23.6 per cent support on Friday.
Banks and miners, which suffered some of the worst losses during the recent sell-off, led the charge yesterday, adding 28.4 points and 24.4 points to the FTSE 100.
Miners were also supported by positive comments by Nomura, which argued the sector had been hit too hard in the macro sell-off, driven by global growth worries.
Shore Capital’s Gerard Lane maintained a defensive approach but highlighted that certain perceived safe havens such as food producers are overvalued, while cyclicals including mining and consumer discretionary stocks appear cheap.
“Miners have become undervalued, but without an easing in policy from China, earnings downgrade may outweigh the valuation appeal for that sector,” he said. He recommended instead media stocks with international earnings, such as Pearson or Reed Elsevier, up 2.1 per cent and 2.6 per cent, respectively.
Weir rose 8.3 per cent to top the blue-chip gainers chart as Barclays Capital became the latest of a string of brokers raising their price targets on the maker of pumps and valves, following the acquisition of shale gas specialist Seabord Holdings last week.
Randgold, down 7.9 per cent, was the only blue chip to close in the red after the gold miner cut its output target due to a series of problems at its Tongon mine in the Ivory Coast.
While stocks rebounded, strategists remained wary of going back into the market until there is certainty that decisive action is being taken to stem the Eurozone’s debt crisis.
“It’s a market I would sell, like I have been doing since August. If you had bet on political events for the past two years, you’d have gone bankrupt a long time ago,” said Robert Quinn, of Standard & Poor’s Capital IQ.
In a sign of the urgency of the Eurozone’s situation, Moody’s warned that the rapid escalation of the region’s sovereign and banking crisis threatens the rating of all European government bonds.
The announcement comes as the Eurozone’s second-largest economy, France, battles to defend its triple-A rating, a necessary condition for the bloc’s rescue fund, the European Financial Stability Facility, to maintain its own top-notch rating.