FTSE surges after Wall Street boost

The London market staged a dramatic turnaround today as improved trading on Wall Street boosted UK blue chips.

The FTSE 100 Index surged 4.8% as positive investor sentiment returned to stock markets globally.

Investors were buoyed early on by a sharp recovery last night as Wall Street’s Dow Jones Industrial Average closed with a 300-point gain.

The Footsie surged as much as 273 points at one stage in a volatile week for the benchmark index – leaving it within touching distance of last Friday’s close, before the turbulence began.

London’s leading share index closed up 266.5 points at 5875.8, in stark contrast to the hefty falls seen earlier this week.

The latest twist came amid plans to prop up US bond insurers or “monolines” - companies which guarantee financial instruments like the mortgage-backed bonds behind the summer credit crunch.

There have been fears that the crisis could raise doubts over the monolines’ ability to pay up if bonds defaulted, meaning that banks would face more losses as the value of their bonds would take a fresh hit.

Continued optimism over the US Federal Reserve’s drastic interest rate cut on Tuesday and bargain hunters also helped buoy the Dow.

A strong rally towards the end of trading in New York last night set the tone for trading on the London market today. Even a £3.7bn “rogue trader” loss for French bank Societe Generale failed to derail European markets.

Anthony Grech, research analyst at IG Index, said: “The big question now is whether we will continue to see further gains back above the psychological 6000 mark.

“Many traders still view this as the line in the sand for the UK market and will possibly remain a bit sceptical of further significant gains to the upside until, and if, this level can be cracked.”

He added: “If the market were to slide and break below the 5700 mark, traders could be left thinking the trap door has opened once again and the short-term confidence seen for today could evaporate.”

Richard Hunter, head of equities at stockbroker Hargreaves Lansdown, voiced caution that stocks are “not out of the woods yet”.

“Firstly, the full cost of the sub-prime crisis has to be totalled up and secondly the markets are unsure whether the US is heading into recession or, if it is in one, how long it will last,” he warned.

In London, major banks such as Barclays, Royal Bank of Scotland and Lloyds TSB all helped drive the Footsie higher, posting gains of more than 8%.

Insurer Prudential continued strength seen yesterday as reports persisted of China’s Ping An insurance building a stake in the group, which closed up nearly 5%.

It has been a week of wild swings, with US recession fears sending world markets tumbling on Monday, wiping £77 billion off the Footsie.

The US Federal Reserve’s dramatic interest rate cut on Tuesday triggered a recovery in London, before economic doubts returned yesterday – sparking another market fall.

Despite today’s latest surge upwards, the Footsie is 9% below its opening point for 2008, and about 13% off seven-year highs achieved last June before the credit crunch shook markets.