US trading surge helps Footsie fight back

London’s leading share index staged a dramatic bounce-back today as investor hopes mounted for a hefty cut in US interest rates.

The FTSE 100 Index soared 3.5% into positive territory to close 191.4 points up at 5605.8, buoyed by a near-300 points surge in early Wall Street trading.

Expectations were growing for the US Federal Reserve to make one of the biggest interest rate cuts in its history when it announces its decision later today.

Investors were anticipating a cut of as much as 1%, which would bring the cost of borrowing in the US down from 3% to 2%.

Today’s gains saw the Footsie recover the bulk of the losses seen yesterday when it fell by almost 4%, slumping to its lowest level for more than two years.

Global markets shaken by the rescue and cut-price sale of troubled US investment bank Bear Stearns also took comfort today in better than expected results from fellow financial firms Lehman Brothers and Goldman Sachs.

Both companies posted first-quarter profits lower than last year, although their shares rose as results failed to fulfil the worst fears of analysts.

The improved sentiment pushed Wall Street’s Dow Jones Industrial Average more than 2% higher, with the Footsie and markets across Europe also following suit.

An interest rate cut from the Fed would mark its second move in three days to ease financial and economic turmoil after a rare Sunday intervention saw it lower the rate at which it lends to banks by 0.25% to 3.25%.

The Bank of England also yesterday made a bid to calm jittery markets amid the credit squeeze, pumping an extra £5bn into frozen money markets.

However, the cash injection was not enough to stop more than £51 billion from being wiped off the value of the UK’s biggest companies yesterday.

Banks were the worst hit, but were back on the front foot today amid the US rates optimism.

Alliance & Leicester and HSBC were posting gains of more than 7%, while investment firm Man Group was 9% better. Barclays and Halifax Bank of Scotland - the two to suffer the most yesterday – rallied 5% and 4% respectively.

Jimmy Yates, trader at CMC Markets said while the anticipated move by the Fed was bolstering markets, any disappointment could see shares swing back into the red.

He said: “An historic 100 basis point cut in interest rates is what the market is expecting, but the fact remains that if the Fed decides to be a bit more conservative, then equities will likely come under even more pressure tomorrow.

“The risk now is almost that it’s a case of the cart leading the donkey – the market wants 1% off, any less or even any more – and we’re potentially going to see a lot of panic in equities again.”

The market volatility comes after investment bank Bear Stearns became the biggest victim of the credit crunch yet when forced to seek emergency funding last Friday. It was eventually bought by rival JP Morgan Chase for a cut-price US$236.2m (£116.4m).

Bear Stearns was heavily exposed to the mortgage-backed investments hit by the credit crunch and last week rumours of problems at the business swept the market, leading to a cash crisis at the firm.

Billionaire British businessman Joe Lewis, whose Tavistock Group firm owns Tottenham Hotspur as well as a host of other worldwide investments, said he has lost more than one billion US dollars (£500m) after the cut-price buyout of the bank.

Chancellor Alistair Darling updated Cabinet colleagues at their regular weekly meeting on the economic turmoil.

Prime Minister Gordon Brown’s spokesman said: “The Chancellor updated the Cabinet on his discussions yesterday and over the weekend with the US Treasury Secretary, the Governor of the Bank of England and the chairman of the Financial Services Authority.

“He explained we were working with authorities here and internationally and doing all we can to maintain stability and growth in the face of continued global turbulence.

“He said that, because of the resilience of the UK economy, our low debt, unemployment and inflation, we were well-placed to deal with the current global financial turbulence and the fundamentals of the UK economy remain strong.”