Shares soar on rates optimism

DIANE COYLE

Economics Correspondent

Share prices rose sharply on both sides of the Atlantic yesterday. In London shares gained nearly pounds 10bn in value, while on Wall Street the Dow Jones index set a new record by passing 4,600 points for the first time by mid-morning.

Interest rate optimism along with an end to the uncertainty of the Tory leadership contest got the credit for the euphoria. Share prices in London are now only slightly lower than before the announcement of the leadership election. However, there was a bumpier ride for gilts and the pound yesterday.

In Britain the outcome of the monthly monetary meeting seemed to be another decision by the Chancellor of the Exchequer not to raise base rates. In the US dealers grew more confident that Federal Reserve policy committee, meeting yesterday and today under Alan Greenspan, would cut interest rates. Markets were poised, too, for a cut in French interest rates today and hope that German rates might fall soon. ``It is the fact that people are very optimistic about interest rates that is driving the markets,'' Alison Southey, equity strategist at Japanese bank Nomura, said.

The end of the latest bout of political uncertainty was cited as a reason for the 46 point rise in the FT-SE 100 index. It closed at 3,394.9, about 9 points below its level before John Major's announcement a fortnight ago.

However, his victory did not do much for the gilts market or the pound. Gilts ended the day about half a point higher than their previous close, but lower than their after-hours high on Tuesday night. Sterling ended a fraction lower at DM2.2030, and 84.3 on its effective index. Steve Barrow, currency economist at Chemical Bank, predicyed sterling would be hit by the next outbreak of hostilities over European monetary union in the Conservative Party, and would fall to around DM2.05 before the general election.