Share markets scale new peaks

DIANE COYLE

Economics Correspondent

Share prices in London closed at a new record yesterday, powered by a further surge on Wall Street, and hopes of lower interest rates. Investors shrugged off turmoil in the Conservative Party.

The London rally came on the back of new optimism about the prospects for a deal between President Clinton and Congress on the budget, which sent US shares higher again yesterday. The Federal Reserve is firmly expected to cut interest rates as a reward for an agreement ending the stalemate that has partially closed the Federal government since the middle of December.

The FT-SE 100 index ended the day nearly 28 points higher at 3715.6. This was lower than the day's highs, but the tone was set in the morning by euphoria over Tuesday's 60-point gain in the Dow Jones index. A weak survey of manufacturing also helped by confirming interest rate hopes.

The Dow finished the day at 5194, up 16.6. By the time London closed, many European bourses had already set their own records. Frankfurt ended just below its all-time high, while Paris was sharply higher.

Since the beginning of 1995 shares in Britain and the US have made spectacular advances. The FT-SE 100 index has climbed by more than 650 points, a 21 per cent increase. Wall Street has risen by 35 per cent. A widespread belief in the ''January factor'', whereby the stockmarket's performance in the first month sets the tone for the rest of the year, has also contributed to market optimism. However, many analysts are cautious about prospects for 1996.

Mark Brown, chief strategist at the broker Hoare Govett, said: ''We are now in the middle of a speculative bubble driven by liquidity. Like all bubbles, it will burst at some stage.'' He added that London would underperform other markets because political uncertainties loomed so large this year.

The dollar bounced to its highest level against the yen for more than three months. Most analysts expect the US currency to move higher than the level of 104.6 and DM1.4421 it had reached by midday yesterday in New York. ''This year the dollar will go up and stay up,'' said Paul Chertkow at the investment bank UBS.

The budget talks resumed yesterday, with reports that Tuesday's meeting had been productive. The approach of President Clinton's State of the Union address later this month and the start of the presidential primaries are seen as powerful motives to end the stalemate.

''The overwhelming feeling is that we're going to get a credible budget agreement,'' said Kevin Flanagan, an analyst at Dean Witter Reynolds in Wall Street. At Chemical Bank, Malcolm Barr added: ''US bonds and equities seem to be dragging the dollar up''.

The market consensus is that the dollar will climb past 110 and DM1.55 during the course of this year. Mr Barr said the US markets looked attractive to international investors.

The financial markets' strength is driven by expectations of further cuts in interest rates by the Federal Reserve. It shaved a quarter point off its key Federal Funds rate last month.

''That move was a downpayment. The Fed will do more if there is a budget deal,'' Mr Chertkow said.

The Fed cut rates from 5.75 to 5.5 per cent last month. Its next policy meeting takes place on 30-31 January.

The dollar reached 104.65 on 20 September, up from a low of 80.63 six months earlier - thanks to co-ordinated action by the G7 industrial countries. It touched DM1.50 in September.