Resurgent share prices boost confidence around globe

Cautious optimism returned to the financial markets yesterday. Diane Coyle in London and Stephen Vines in Hong Kong report on a bounce in the world's stock markets as fresh signs of strong economic growth in the US and UK bolstered investors' confidence.

Comparisons of the ups and downs in world stock markets to a roller- coaster started to look like real understatement as share prices bounced back around much of the globe yesterday.

The FTSE 100 index ended up 64 points at 4,906.4, while the Dow Jones index was up 158 points at 7,600.23 by midday. In Asia, Hong Kong and Singapore made gains of 6 per cent and 7 per cent respectively.

In the UK and US the impetus came from surveys showing that both economies are expanding rapidly. The monthly survey of purchasing managers in manufacturing by Britain's Chartered Institute of Purchasing and Supply showed a rise in output and orders in industry last month despite the continuing strength of the pound. The results, which put manufacturing activity at its highest for six months and showed the first rise in overseas orders since June, seemed to confound gloomy predictions that the exchange rate was bound to start damaging exports.

David Bloom, an economist at James Capel in London, said: "We have found that industry can live with a pound around DM2.90. If it were going to hammer exports, it should have happened by now."

Peter Thomson, director general of the CIPS, said: "Britain's manufacturing sector continues to show solid growth."

Alongside yesterday's survey came official figures showing a pick-up in the growth of M0, the narrow money measure consisting mainly of cash, to 6.4 per cent; and a report from the Halifax of a 0.4 per cent rise in house prices last month. Although the Halifax's index showed annual house price inflation of only 5.4 per cent, less than half the rate reported by the Nationwide, the lender said it showed that a "modest recovery" in the housing market was continuing.

The figures led many analysts to say the Bank of England would have to raise interest rates at some point in the near future. But most think the Monetary Policy Committee will not make the move after its meeting tomorrow and Thursday because of the recent stock market instability.

Although a rise this month would now surprise commentators, the financial markets reacted to yesterday's economic news by taking the pound higher. It climbed two pfennigs to just over DM2.91, little affected by a comment from Eddie George, Governor of the Bank of England, that the UK should be considered to be preparing for eventual membership of the single currency.

Across the Atlantic, the parallel survey of the National Association of Purchasing Managers, showed an unexpected jump in manufacturing activity in October. An increase in orders and output took the index well into what is normally considered boom territory.

As in the UK, however, analysts reckon that an expected increase in interest rates will be postponed until the episode of stock market turbulence is over.

In Asia, analysts predicted that investors would start to pay closer attention to the merits of different markets rather than taking a negative view of Asia as a whole.

"The region seems to be settling into good cases and bad cases rather than assuming that everything's linked in an identical way,'' said John Mulcahy, managing director of the W I Carr brokerage in Hong Kong.

There was some evidence for this view yesterday as some stock markets, including Hong Kong and Singapore, roared ahead, while the Thai and Philippines markets did little other than tread water.

The Singaporean government was even feeling confident enough to shrug off its own currency woes, backing moves yesterday to shore up the ailing Indonesian currency. This gained almost 6 per cent against the US dollar thanks to the massive package of overseas loans totalling some $38bn.

In Hong Kong there was a feeling ``that things have been overdone'', according to Howard Georges, the vice-chairman of South China Securities.

Confidence in the Chinese economy has grown too. The easiest way for investors to get a stake in this market is through the Hong Kong stock exchange where yesterday ``red chip'' recorded a 13 per cent rise.

But investor unease seemed to be focusing firmly on Thailand, the Philippines and South Korea because of political uncertainties.