Late rumours propelled J Sainsbury to pole position on the FTSE 100 yesterday, boosting the stock by almost 8 per cent or 25.25p to 344p in the final hours of trading.
The speculation suggested that the supermarket may soon be the subject of a 500p per share bid but bore no clues about the identity of the suitor. "It's a vague rumour but it's picked up steam since it follows earlier suggestions that the Qataris may try and take over again," said one market source, referring to earlier rumours of bid interest from the Middle Eastern investors who attempted to acquire the company last year.
Sceptics said that while the rumours may have pushed the stock ahead of its peers, much of the strength was probably down to better-than-expected US GDP figures.
Economic data from the Commerce Department revealed that US gross domestic product expanded at an annual pace of 3.3 per cent in the second quarter, up from a 1.9 per cent estimate made last month. The news energised the wider market as investors, fearful of a sharp slowdown, expressed relief at the resilience of the crucial American economy.
Marks & Spencer, which gained almost 4 per cent or 9.5p to 255.25p, and Next, which gained 4.14 per cent 42p to 1057p, were among the other high street names which drew strength from the buoyant sentiment.
Anthony Grech, market strategist at IG Index, said the US data had put "a rocket under prices".
"The GDP figures were better than expected, helping to put fears of recession on the back burner for at least the short term – and this positive sentiment spilled over into London trading," he said.
As a result, the FTSE 100 swung past the 5600 point mark, up 73.1 points at 5601.2. The FTSE 250 was also strong and gained 134.6 points to 9271.7.
Barclays was among the brightest features in the banking sector, up 5.83 per cent or 19.25p at 349.5p, after Societe Generale said the stock was best positioned for a recovery from current lows, setting a 530p "recovery target price".
The wider sector was also on a firm footing as leading stocks capitalised on better than feared results from Credit Agricole and the news from America. At close, HBOS was up 12.25p at 305.5p while Lloyds TSB was 10p firmer at 305.5p.
RSA Insurance advanced to 154.1p, up 5.69 per cent or 8.3p, followed renewed rumours of bid interest from Zurich Financial Services.
Takeover talk was also evident around BT, which gained 4.36 per cent or 7.2p to 172.5p. Firmer support, however, came from Goldman Sachs, which added the stock to its "buy" list for the first time since October 2000.
On the downside, Severn Trent, down 30p to 1375p, and United Utilities, down 3.5p at 717.5p, missed out on the market rally after Goldman Sachs, mindful of regulatory risks, lower earnings and the impact of tighter credit markets on a possible bid, issued a "sell" note on the two water companies.
The broker said that, given the problems in the credit markets over the last six months, the premium to regulated asset value (RAV) at which a potential bid for a UK water utility is likely to be pitched has fallen, to 10 per cent from 22.5 per cent on its estimates. At the same time, a likely cut in the allowed rate of return for water companies when Ofwat, the water regulator, concludes it five-yearly price review in 2009, is set to impact earnings, Goldman added.
Based on its assumption of a cut in the allowed rate of return to 4.3 per cent for 2010-2015 from the 5.1 per cent for 2005-2010, the broker expects earnings per share for 2011 to fall by 23 per cent at United Utilities and 18 per cent at Severn Trent, posing a threat to dividends at both in 2010-2015 period.
Elsewhere, traders said that better-than-expected results from property investor Capital & Regional, which gained 17.53 per cent or 27p to 181p, and estate agent Savills, which added 17.01 per cent or 41.25p to 283.75p, had kicked off another round of short covering among housebuilders.
Taylor Wimpey gained the most, up 10.36 per cent or 5p at 53.25p as more bears moved out. According to the latest figures from Data Explorers, the amount of Taylor Wimpey stock out on loan has come down to 15.8 per cent from 17.3 per cent on the 12 August.
Among smaller companies, Asterand gained another 11.63 per cent or 1.12p to 10.75p after Daniel Stewart issued a "buy" note following the company's recent interim results.
"Asterand continues to exceed market expectations. The company not only achieved EBITDA (earnings before interest, tax, depreciation and amortisation) ahead of schedule, but it also closed a surprise licensing deal with a major biotech company," said the broker, setting a 22p target price on the stock.