Surging banks push global markets higher

Banks rallied as fears about the likely results of European stress tests waned and the likely regulatory risk eased, pushing world markets higher.

The FTSE 100 was 67.9 points, or 1.36%, higher at 5082 ahead of today’s Bank of England rate-setting meeting. Rates are expected to remain unchanged but economists expect the three way split on policy to persist.

The mid-cap FTSE 250 was 153 points higher at 9715.

In the US, the DJIA stormed 274 points or 2.8% higher – passing through the 10,000 level for the eighth time this year to close at 10,018. US shares had been trading back at eight month lows after a flurry of downbeat economic data and weighed down by fears over European debt levels. 

One London based trader pointed out banks led a late surge in Europe on Wednesday with markets pleased by the further updates around the European banks stress test.

The broader S&P 500 finished the day up 32.21 points, or 3.13%, at 1,060.27 higher.

Banking group State Street jumped nearly 10% after it lifted its quarterly earnings forecast. The news was particularly welcome given recent cautious trading updates from a number of European investment banks and amid growing fear the slowing recovery could stymie earnings growth for the sector.

Morgan Stanley said the larger US banks will not have to raise more cash and some such as JP Morgan could soon begin to pay dividends again.  

The optimism continued in Asia, where the Nikkei added 256 points, or 2.76%, to 9535.

Across the channel, the CAC 40 was 1.15% higher and Spain's IBEX was 1.10% higher.

It wasn't all good news though. The IMF - which has lifted its growth forecast for the US and for the world economy as a whole - cut its estimate for the UK by 0.1% for this year and 0.4% for 2011.

Deutsche Bank analysts believe we need 5-6 years of 5-6% nominal GDP in the US before we can be sure systemic risk has been brought back to more normal levels, adding this will be difficult to achieve and the market 'will flip between optimism and despair' for several years.

On the corporate front, banking shares tracked their peers higher. RBS led the way, up 1.77p to 44.6p and Lloyds added 2.38p to 60.6p. Barclays added 10p to 301.5p 

Credit Suisse strategist Andrew Garthwaite has upgraded European banks to 'market weight' from 'underweight' saying the economic headwinds have abated and the European sovereign credit risk is overstated.

He said investors should buy domestic UK banks and emerging market plays such as Standard Chartered and underleveraged banks such as HSBC.

The two Anglo-Chinese banks were up 16.5p at £17.10 and 3p higher at 617.7p respectively.

Oil giant BP's winning streak continues with shares up another 7.5p at 369.5p as investors believe shares have bottomed and will continue to recover as newsflow is expected to improve over coming weeks.

Primark owner AB Foods added 16.5p to 997 after a well received trading update.

On the second line, staffing group Hays led the pack, up 5p at 95.6p after it said strength in its Asian business meant net fees are growing again.