Financials and mining stocks helped lift the market sharply higher today.
With an extra boost from Wall Street on rising hopes of a US interest rate cut next week, the FTSE 100 jumped 146.6 points to 6280.7.
The Dow Jones Industrial Average was around 120 points higher by the time London closed, with investors cheered by a slight fall in the US trade gap in July and a growing belief that the Federal Reserve could cut US rates by as much as 50 basis points. Fed chairman Ben Bernanke did not specifically mention interest rates or the prospects for the US economy in a speech to the Bundesbank, but investors took heart from the fact he had not dampened the rate cut expectations.
Back this side of the Atlantic, some of the more cautious traders pointed out that volumes were still thin, with few shares actually traded, and that the recent credit concerns have not gone away.
But for the moment the optimists had the upper hand.
Barclays led the risers in the FTSE 100, adding 27.5p to 607.5p on growing talk that a consortium led by Royal Bank of Scotland, up 15.5p to 546p, was the more likely winner in the battle for Dutch group ABN Amro. Northern Rock, hard hit by concerns about its exposure to the troubled wholesale money markets, bounced back 26p to 672p.
Fund management firm Invesco recovered from its recent fall, which was based on worries about the effect of the current market turmoil on the company. Today it added 21p to 578p.
Retailers were also in the spotlight.
Next added 79p to £19.40 as half-year profits up 11% to £198m came in ahead of expectations. The outlook statement however was cautious, and dealers pointed out that there are massive short positions in Next, so a bear squeeze could explain part of the rise.
Still Nick Bubb at Pali International was positive after an analysts' meeting.
He said: "Next has a nice habit of wrong-footing the bears and the good news today was a strong half-year pre-tax profit outcome: we looked for £184m, a tad above consensus and just 3% above last year, but profits were actually 11% ahead at £198m.
"The bad news is that current trading is disappointing, with like for like retail sales nearly 5% down. The outlook statement was surprisingly cautious, in fact, pointing to a much slower second half for Directory and lower overall half-year group profits to leave the full year in line with current market expectations, despite the strong first-half outcome.
"After the analysts' meeting we feel happier. The fact is that Next is cautious about the economy and the pressures on the consumer, but all it is doing on fresher clothing ranges, improved marketing and more exciting shop refurbs is convincing and market share looks in good shape. The new TV ad (with background lyrics from KT Tunstall's song 'Suddenly I See') is terrific and should restore people's faith in the brand.
"We think the second half will not turn out to be so bad as Next expect and so we are upgrading our full year [forecast] from £490m to £500m. A PE of only 11.5 looks too low for a business of this quality and we reiterate our buy and £22.50 target."
Still with the shopkeepers, supermarket group Tesco added 18.25p to 433.5p after an upbeat note from Lehman Brothers. The bank raised its recommendation from equal weight to overweight and set a near-term target price of 525p, with a long-term valuation of 734p by 2011/12. This is partly based on the prospects for Tesco's overseas expansion.
"International returns have been constrained as Tesco's management focuses on implementing the long-term infrastructure required for a successful business in each country," said Lehman. "With much of this infrastructure in place and the capital sunk, Tesco has a strong blend of mature, growing and start-up ventures. It is our opinion that the international business will start to thrive, thereby accelerating the globalisation of Tesco."
French Connection was steady at 172p despite predicting a second-half fall in sales due to the difficult retail climate at the moment.
But DSG International - the electrical chain formerly known as Dixons - slipped 0.3p to 146.9p as Morgan Stanley downgraded its price target from 155p to 135p and its rating from equal weight to underweight.
"Although we see this is an early call we believe that DSG shares are likely to perform very poorly in 2008," said Morgan. The bank believes new chief executive John Browett will be more radical with his strategy than the market expects, which could lead to a cut in the dividend.
"DSGi is much more sickly than most investors realise," said the bank. "DSG's profit densities have been declining for a decade. If current trends continue, profitability will disappear altogether within 10 years. Moreover DSG is not as cash generative as most investors perceive: if leases were capitalized on the balance sheet the group's cash position would be worsening each year."
It said radical surgery was needed, or the shares could fall back to 75p. It reckoned the best solution was a merger between DSG's PC World and Currys brands.
"We think that Mr Browett should look to integrate the two chains as quickly as possible," it said. "But it will be painful. We believe that merging PC World and Currys would result in exceptional costs of £300m, possibly more. Add to this the capital expenditure and working capital implications, and the total cashflow impact could approach £500m." Hence the threat to the dividend.
So DSG was one of the few fallers in the leading index.
But the real loser in the sector was JJB Sports, down 28.5p to 172.25p after a profit warning.
The news also hit Mike Ashley's Sports Direct, down 6.25p to 131p. Yesterday the shares edged up as it failed to provide investors with an expected profit warning, but also failed to provide much in the way of financial information either.
Panmure Gordon repeated its sell recommendation on Sports Direct. "The current scenario of falling sales and rising debt is not sustainable," said analyst Philip Dorgan. "With only 5p a share of property support, we believe the shares have further to fall. The appointment of a new chairman is crucial, but we expect this will bring forward the bad news."
Meanwhile replica kit company Umbro, where Sports Direct yesterday declared a 5% stake, slipped 1.75p to 120p.
Tomorrow sees the changes in the FTSE indices. As things stand Kelda, up 17p to 869p, Segro, 11.5p better at 511p, and Drax, ahead 5.5p to 627p, are due for relegation from the FTSE 100.
Tullow Oil, up 5.5p to 555.5p, Tui Travel, down 0.5p to 272p and Taylor Wimpey, up 4.5p to 333.25p, are in line to take their places.
With metals prices on the way up, mining group Vedanta Resources rose 57p to £18.67 while BHP Billiton was 60p better at £14.71.
Building materials group Wolseley also rebounded, up 35.5p to 963.5p. The problems in the US housing market have hit the company hard, but traders said today the shares had fallen too far. The company also announced five small acquisitions totalling £87m.
Housebuilder Redrow rose 14p to 514p despite flat full year profits. The company is many analysts' top tip as a bid target in the sector because of the attractions of its land bank, with Shore Capital suggesting Persimmon, up 20p to £10.97, as a possible buyer.
Aim-listed Intellego, the e-learning business, added 0.125p to 2.25p as investors awaited news of the intentions of entrepreneur Charles Denton, who has built up a 18.58% stake. Meanwhile a former director of Intellego, Edward Arnett, has cut his stake to 4.03%.
Bezant Resources, which has gold and copper deposits in Tanzania and the Philippines, added 8p to 81.5p. The company announced that two diamond drilling rigs have arrived at its Philippines project and operations have now begun. It expects to get the first results in the fourth quarter of this year.
Finally Andor, which makes high-performance digital cameras, slumped 20.5p to 65p after it warned second-half sales would be lower than market expectations. Analysts at the company's broker Landsbanki cut their full-year profit forecast by 25% to £1.2m but said the shares remained a buy.