Shares in UK and US bound to record highs

Hopes of further interest rate cuts spurred shares to record highs on both sides of the Atlantic yesterday. News of a fall in UK inflation in October combined with renewed signs of weakness in the US economy to send stock markets soaring.

The FT-SE 100 in London closed 39.4 points higher at 3,610.8, while the Dow Jones index was 33.6 points ahead at 4,956.35 by mid-morning in New York, putting it on target to break through the pyschologically important 5,000 barrier.

The previous all-time high in London was set on 18 October, when the Footsie hit 3,598 at one stage and closed at a record 3,593. Commenting on the latest surge, one senior trader said: "Interest rate hopes are keeping people investing and pushing the market." CSFB analyst Philip Tyson forecast that the latest inflation data shifted the probability in favour of "a 50-basis point cut before or around the end of the year."

Gilts received an additional boost from news that the Government's finances are at last starting to improve after several disappointing months of public sector borrowing

On Wall Street, the Dow, which started the year at 3,833.48, has been setting new highs for most of November. The catalyst for yesterday's jump in shares was weaker-than-expected figures from the Philadelphia Federal Reserve Bank. The Philadelphia Fed, one of the regional offshoots of the US central bank, said its business outlook diffusion index fell sharply to 7.9 in November from 25.5 in October, while its prices paid index dropped to 12.3 from 30.3.

Following on from Wednesday's announcement of a fall in US output, the report fuelled renewed speculation that the Fed may cut interest rates again before the end of the year if the budget dispute in Washington is resolved. The hopes pushed long bonds up over 1-2/32 to yield 6.22 per cent, with shares following in their wake.

"It's awesome," said Ralph Acampora, director of technical research at Prudential Securities.

"The rally is broad based and includes most of the Dow stocks, regardless of industry, and it's dragging the other indices up.

"This is quality blue-chip leadership and you can't beat that." The Dow could hit 5,000 "maybe tomorrow", he added.