Rally takes FTSE 100 to six-month high

The rally in world stock markets continued apace yesterday as an encouraging survey of US manufacturing boosted hopes that the world's largest economy was on track for a solid rebound.

In London, the FTSE 100 index of leading shares surged 2 per cent or 81 points to hit a six-month closing high of 4,129.

On Wall Street, the Dow Jones closed at its highest level this year, up 0.54 per cent at 8,897.81, having earlier breached the 9,000 level for the first time since last December.

Hopes were boosted by a survey of manufacturing from the influential Institute of Supply Management which showed factory output rebounded last month. Its index rose to 49.4 from 45.4 in April, beating economists' forecasts for a rise to 48.6 on a scale where a reading below 50 suggests contraction in the sector.

Norbert Ore, the head of the ISM survey, said the rebound in both new orders and production was very positive. "We're coming back out of the doldrums in this post-war period," he said.

Mike Lenhoff, chief strategist at stockbrokers Brewin Dolphin, said markets on both sides of the Atlantic had jettisoned the negative attitude of the last nine months. He said the FTSE 100, which has risen 28 per cent from its March low of 3,200, had now established 4,000 as the bottom end of its trading range.

"This will be taken as a vote of confidence in the emerging recovery and sounder fundamentals backdrop that should eventually set the stage for the FTSE 100 to move onwards and upwards," he said.

But he warned the current rally would probably run out of steam when the FTSE 100 hit 4,200. "Equity markets are overbought and it would be unusual if they did not consolidate their gains," he said.

European markets continued to benefit from the US rally. This was fuelled by a rebound in the dollar yesterday, which will make European goods cheaper for US buyers.

The markets are also hoping for a dramatic cut in interest rates by the European Central Bank, which would boost domestic demand within the eurozone.

The door to a rate cut opened wider yesterday when the "flash" estimate of inflation showed the headline rate had fallen below the ECB's ceiling of 2 per cent for the first time in a year. Meanwhile, the contraction in eurozone manufacturing activity picked up speed last month while consumer and business confidence both fell.