Most economists at broking houses construed yesterday's events to mean that Germany was putting its domestic interests first. Suggestions that the ERM was in its 'death throes' were common.
With the currency markets in turmoil after Germany's decision not to change the key discount rate, equity dealers turned over more than 220 million shares in the last 90 minutes of business.
There was strong talk that Germany had opened the door for a fresh round of interest rate cuts in the UK, and many believed that the current level of 6 per cent may be as low as 4 per cent by Christmas.
Investors were also heartened by the possibility that France may follow in the UK's footsteps, dropping out of the ERM with a boost to its economy coming from a subsequent devaluation of the franc.
The FT-SE 100 share index, which was sporting a 9.1 point advance in mid-afternoon dealings, finished on the day's high of 2,917.6 - a rise of 33.4 points.
Market-makers were caught short of stock. Consumer-related sectors were particularly strong. More than 100 shares hit fresh highs for the year.
Strong buying in the futures market saw the September contract trade at more than 2,930, and a firm opening on Wall Street also contributed to the FT-SE 100's run to within 40 points of its record closing high.
The Footsie has now risen by 90 points since the start of the week, and is showing an 85-point gain over the account.
Total volume trading fell just short of 700 million shares, aided by new-time buying before the shutters come down on the account today. That took the total over the past three days comfortably above 2 billion, which is very respectable for what is traditionally one of the quietest weeks of the year.
The euphoria also spilled over into second-line stocks. A 28.2-point advance to 3,273 was recorded by the FT-SE 250 index. Non-FT-SE 100 volume totalled 400 million shares.
Long-dated gilts overcame early profit-taking and closed with gains extending to half a point. Short dated issues, however, were little changed.
This was all good news for shares in merchant banks, particularly those active in market making. Warburg climbed 11p to 747p and Kleinwort Benson added 12p to 42p.
Banks made more ground ahead of today's start to their interim reporting season by Lloyds. Barclays added 8p to 487p, Lloyds put on 5p to 582p, National Westminster rose above 500p with a 10p gain to 501p, and TSB improved 4.5p to 205.5p.
A firm base for the day was established by several healthy trading statements, including ones from two heavyweights and Footsie constituents - ICI and Zeneca.
ICI rose 16p to 666p and Zeneca hit a high of 646p, up 24p, since being demerged from the chemicals giant. Volume in both was solid, amounting to 8.2 million in ICI and 8.6 million in Zeneca.
Footsie stocks to miss out on the merriment included British Telecommunications, off 2p to 415.5p, and RTZ, down 5p at 670p.
There were signs that Warburg had virtually cleared the stabilisation shares it held for the BT3 issue, notifying the market that its stake had fallen below 3 per cent.
Trading in the BT partly paid was again heavy at 22 million. The price eased 2p to 172p.
BT also held its annual meeting, telling shareholders that competition and regulation were the main concerns facing the group.
Competing telecommunications companies, however, were heartened by that statement. Cable & Wireless climbed 26.5p to 814.5p, and Vodafone sprinted to 469p, up 16p and not far below the year's high of 471p.
Wellcome, 1p easier at 695p, and Glaxo, 2p softer at 556p, ran into some profit-taking after Wednesday's gains on the Warner Lambert deal.
Water utilities were boosted by Warburg and Smith New Court highlighting their high yields. Anglian advanced 10p to 586p, Severn Trent gained 12.5p to 488.5p, Southern increased 22p to 512p, and Welsh leapt by 15p to 558p.
The recent run in oils was maintained, helped by the price of crude holding ground above dollars 17 a barrel. BP closed 8p better at 307p, Burmah Castrol added 7p to 738p and Shell finished at 638p, up 6.5p.
Alliance Resources' return from suspension at 9.5p on completion of the Manx takeover was met with a 3.75p drop to 5.75p.
Forte recovered 3p to 217p following the previous day's 5p fall on a placing of 14 million shares.
Bass, up 9p, finally disclosed it was in negotiations to sell the Augustus Barnett off-licence chain to Allied-Lyons, ahead 12p to 570p.
Belief that FNFC would today announce its long-awaited refinancing with interim results sent the shares up 7p to 85p. Enfranchisement hopes lifted Pifco 'A' 25p to 493p and the ordinary by 26p to 518p.
The FT-SE 100 share index soared by 33.4 points to close at 2,917.6 and stand just 40 points adrift of its all-time high. Volume trading was heavy for the third day running, with nearly 700 million shares turned over. The account closes today and settlement is on 9 August.
There was an industry rumour that Evered Bardon, the quarrying group, may soon face a bid. The predator is said to be Charter Consolidated, which is primed to expand after the sale of its stake in Johnson Matthey and which will soon be free of Minorco, a 38 per cent shareholder. Evered has previously been tipped as a target for MB Caradon, the building products group. Evered stands at 45p.
Europa Minerals dipped 2p to 35p after Mount Edon Gold lifted its stake from 10 to 18 per cent and said it might make a full bid below 37p a share. Mount is understood to have paid 33p for the extra shares. However, Burmine and Austmin of Australia are set to launch a counter three-way merger deal that, some believe, may value Europa shares at 45p. Burmine's deal could be announced today.
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