Market Report: Traders look to the Fed for holiday season boost

Financial stocks dominated the blue-chip index on what one trader called a "pathetic day for the market" as the silly season continued to drag. The FTSE 100 ended the session 78.1 points higher at 5,410.5. Volumes were weak – less than 300 million shares had been traded halfway through the session – with all eyes on data due to be released on both sides of the Atlantic.

In particular, there has been much anticipation about a return to stimulus spending today in America with the US Federal Reserve due to meet. Joshua Raymond, market strategist at City Index, said: "We are seeing a lot of speculative buys on optimism that the Fed will announce some extra stimulus measures to help maintain the recovery." The Bank of England's inflation report follows tomorrow.

This gave the under-pressure financial stocks a lift. Barclays was the best of the banks, gaining 10.4p to 335p, rebounding from the previous week's declines. Elsewhere, Legal & General was the pick of the insurers, rising 3.15p to 90.25p to top the index following backing from Deutsche Bank.

It was also viva Aviva as two brokers lifted their price targets on the stock. Panmure Gordon raised its price target from 496p to 535p following better-than-expected interim results last week. With the stock on a price to earnings of just 6.7 times' estimated full-year revenues, and the dividend set at 6.8 per cent, the analyst Barrie Cornes' recommendation of a "buy" found favour in the market. Bank of America agreed that the stock was cheap and "also a performance laggard. Signals of change are encouraging". Aviva closed the day 8.3p up at 390p.

Strongest for much of the day was Schroders after the asset management group received the backing of Bank of America Merrill Lynch. Despite keeping its rating neutral, the broker hiked its price target from 1225p to 1545p yesterday. The analyst Philip Middleton said the move reflected recent upgraded earnings – "We currently see some upside potential in the stock" – before cautioning that he "would want a better entry point given the strong recent performance of the shares". The shares climbed 58p to 1429p.

Further power behind the rise on the top tier was provided by strengthening commodity prices. Lonmin rebounded strongly after its shares had suffered on Friday from a ruling in South Africa ordering it to stop selling nickel, copper and parts of its platinum production in a dispute over prospecting rights. It rose 33p to 1590p.

Big oil was also up, with BP climbing higher after its latest update on the cost of capping the oil spill in the Gulf of Mexico. As it revealed the cost of the response so far was $6.1bn, the shares rose 7.4p to 432.75p.

Petrofac advanced as it won a $430m contract from the Kuwait Oil Company. The shares strengthened 16p to 1318p after it announced the deal to develop a system to help oil recovery around pumping water.

Increased expectation of a takeover deal saw a rise in International Power shares. GDF Suez revealed last month that it was in talks with its UK rival over a potential tie-up, resurrecting negotiations that collapsed earlier in the year. Bankers were working through the weekend to finalise a deal which is expected to be announced today as both companies report their half-year results. International Power's shares climbed 13.6p to 380p as investors gambled that the deal would go through this time.

On the mid tier, Babcock International was among the stand-out performers after a positive note from Execution Noble. The engineering group enjoyed a 32p rise to 563.7p following backing from the broker that dismissed fears that the maintenance and outsource market was not a great place to be in the short term. "We believe Babcock has several prospects which offset this risk: in particular, we believe there is short-term positive potential in Rail and South Africa which could both show some sign of turnaround this year," it said.

Mitchells & Butlers, the pub group, rose 1.8p to 324.6p after it sold off Hollywood Bowl for £39m.

On the downside, Connaught continued its plunge. The beleaguered social housing provider fell almost 30 per cent following another profit warning on Friday. The company remains in talks with its creditors over how to restructure its flagging finances. But, with talk that investors could be wiped out, the smell of fear was pungent, sending it down 4.5p to 11p at the close.

Investors in the ceramics maker Portmeirion went a bit potty as the group rose, before sliding 6 per cent to close at 415p. This despite first-half profits almost doubling to £1m from £532,000 a year earlier. Chairman Dick Steele said the results demonstrated "the strength of our brands". The half year numbers were also helped by the acquisition of Spode and Royal Worcester, the company said.

Also on the downside, United Carpets, the second largest carpeting company in the UK, fell 0.125p to 9.3p after it revealed that trading since its financial year-end in March had flagged. Chief executive Paul Eyre also raised fears about the possible impact of government cost cutting, adding that "the market environment remains challenging, with little improvement in volume across the housing market and an understandable sense of caution amongst consumers".