The Monetary Policy Committee (MPC) is expected to reduce the cost of borrowing either today, after its monthly meeting, or next month. This would be the fourth cut in UK interest rates since October.
A third day of euphoria on some continental exchanges following the successful launch of the euro boosted London. So did the fact that Wall Street reached a new high in early morning trading in New York.
A prediction of a stock market crash of 20 to 30 per cent and subsequent recession, made by Barton Biggs, the prominent investment guru at Morgan Stanley, did nothing to dampen the fizz.
The FTSE 100 index ended nearly 191 points, or 3.2 per cent, higher at 6,148.8. This took it back through the 6,000 level and within 30 points of its July all-time high of 6,179.
In the rest of Europe, Frankfurt saw the biggest gain, the DAX index climbing 3 per cent, and the CAC 40 index in Paris rose 2 per cent. Several markets were closed for a holiday.
The Dow Jones soon passed its previous peak of 9,374.27, and had gained more than 151 points to stand at 9,462.33 by midday. In the US the surge in share prices was again linked to investors pouring money into computer and technology-related shares, which have been the main beneficiaries of the traditional January inflow of funds to the market.
But some voices continue to warn that the share price bubble must burst. Andrew Smithers of Smithers & Co warned that it "risks becoming a catastrophe". But Wall Street shrugged off such fears. "Investors are ready to load back up," said Robert Froehlich, chief strategist at Scudder Kemper Investments.
Microsoft, Lucent and MCI were among the big price gainers. So was Amazon.com, the Internet bookstore: its shares soared 12 per cent in early trade after it said fourth-quarter sales quadrupled to almost $250m (pounds 150m), with a million new customers signing up.
The battle between Vodafone and Bell Atlantic for AirTouch Communications sparked hopes of other telecoms takeovers. The car industry is another where the prospect of merger activity has boosted investor enthusiasm. Shares in DaimlerChrysler, VW, BMW, Renault and Peugeot rose on the grounds that overcapacity and economies of scale in the single European market make a fall in the number of car makers inevitable.
London shrugged off the latest gloomy report on the economy. The survey of the services sector by the Chartered Institute of Purchasing and Supply showed a decline in business for the second successive month. The index also showed a fall in employment in December for the first time since the survey was launched two years ago.
The only sector to show any growth in new business was computing and information technology. Overall, one in four of companies surveyed said their workload had fallen in December. Although the mood remained upbeat, with optimism improving for the third month running, the survey was weaker than analysts had expected.
Richard Iley at ABN Amro said: "This will keep up the pressure on the MPC to ignore the temptation to wait and see this month."Reuse content