Markets claw back much of their losses

Stock markets, commodity prices and emerging market currencies clawed back much of their losses as analysts said the sell-off had gone too far.

In London the index of leading UK shares recorded its largest one-day gain since the end of the Iraq war three years ago. The FTSE 100 closed up 146 points, or 2.6 per cent, at 5,678.7, its biggest one-day points rise since March 2003, and largest percentage gain since April 2003.

On Monday it fell 124 points or 2.2 per cent, as almost every market around the globe fell, some by as much as 9 per cent.

"We believe that what we are seeing is a correction in what remains a secular bull market," said Mike Lenhoff, the chief strategist at the brokers Brewin Dolphin.

The UK benchmark index was boosted by its exposure to commodities via mining stocks such as Antofagasta, Kazakhmys and Xstrata, which rose 10 per cent. Copper prices rose $870 a tonne, or 11 per cent, the biggest ever daily gain on the London Metal Exchange. Nickel rose 6 per cent to a record $22,025 a tonne.

David Shairp, a global strategist at JP Morgan Asset Management, said there could be a short-term bounce in markets over the coming fortnight.

"Markets have fallen to an extent that they are starting to look oversold," he said. "Our view is that the sell-off looks to be corrective rather than fundamental, with some of the outperforming markets and sectors, such as commodities and emerging market economies, being sold off."

Across the Atlantic, US markets were initially buoyed by the rebound in prices of commodities and oil, which jumped back over the $71 a barrel mark in London and New York. But the Dow Jones failed to close in positive territory as nervous Wall Street traders sold into the rally in the final half hour, leaving the blue-chip index down 0.2 per cent.

The Organisation for Economic Co-operation and Development said the outbreak of volatility in markets in recent days was a return to normality after several years of calm. "I don't find it worrying as such," Jean-Philippe Cotis, its chief economist, said. "It will be a bit more lively, with more fluctuations, but it may just be a return to normality. What was puzzling was this absolutely smooth financial environment."

Mr Cotis said the world was entering its fifth year of economic expansion but warned that the key threat remained a sudden collapse in the value of the dollar. "A brutal unfolding of such imbalances would hurt the world economy, with perhaps the largest output losses concentrated in the least resilient regions, not least the euro area," he said.

It forecast its 30 industrialised country members would post average growth of 3.1 per cent this year. British economic growth would accelerate to 2.4 per cent this year and 2.9 per cent in 2007, it said. "The Bank can afford to keep interest rates unchanged while waiting to see whether underlying inflation maintains its recent moderate path, or picks up as a result of higher wage inflation and spillover from higher energy prices," the report said.

Outside the OECD area, the report forecast China to grow 9.7 per cent this year, India 7.5 per cent, and Russia 6.2 per cent.