Market reaches new high on hopes of German rate cut: London market helped by surge on Wall Street - Sterling falls as gilts are sold in favour of European bonds

LONDON shares romped to a new high yesterday, riding a fresh wave of optimism prompted by hopes of lower German interest rates and a rally on Wall Street.

The FT-SE 100 index of leading UK shares climbed by 29.9 points to a closing level of 3,079.2, a shade below the day's best.

A Bundesbank central council meeting today is widely expected to lower its key interest rate after figures for inflation in three German states suggested that upward pressure on prices has virtually flattened.

Although the German central bank announced there would be no press conference following the meeting, there was widespread confidence of a reduction in the discount rate from the current 6.75 per cent. But analysts say that an unchanged monetary policy could prompt a sell-off in European equity markets.

The dollar rose by 1.3 pfennigs to DM1.6930 on hopes of lower German rates, but the pound ended 0.84 pfennigs lower at DM2.5060, and down 1.45 cents at dollars 1.4820. Sterling's fall was said to reflect sales of UK gilts for purchases of European bonds in anticipation of higher prices, following a fall in German rates.

The latest upswing in UK share prices was helped by records set the previous day on Wall Street, where shares were underpinned by low inflation prospects that have pushed up US bond prices. Yesterday, the Dow Jones Industrial Average climbed to new peaks, rising 13.13 points to close at 3,652.09.

There was no reaction to the latest UK construction figures, which showed that orders for new construction dropped by 11 per cent in the second quarter from the first three months of the year. But order volumes were still 11 per cent above levels achieved in the same period of 1992.

US markets yesterday largely ignored the latest batch of figures, which disclosed that a slump in demand for new cars and aircraft pulled down US durable goods orders by 3.8 per cent last month. However, the fall in July, the steepest decline since December 1991, followed an upwards revised gain of 4.5 per cent the previous month, underlining the volatile nature of the series. If highly erratic transportation goods are ignored, orders for durable goods advanced by 1.3 per cent, following an increase of 1.4 per cent in June.

There was better news from sales of existing US homes, which rose by 5.4 per cent in July to hit the highest turnover in dwellings since December 1992. The increase reflected the fact that US mortgage rates now stand at their lowest level for more than 20 years. The traditional summer upswing has also been helped by stable prices.

George Hodgson, page 33

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