The markets drank deeply from the well of takeover optimism following reports that Northumbrian Water Group was a target. The rumours helped to lift the FTSE 100 index by 58.8 points to 5,247.4.
Shares in the Durham-based utility leapt by 12 per cent amid talk that a Canadian investment group, the Ontario Teachers' Pension Plan, was preparing a £1.7bn bid. Some analysts suggested there could be a feeding frenzy for other water stocks.
UBS said the potential for mergers and acquisitions in the sector "should become an increasing trend and should not be underestimated". Lakis Athanasiou, an analyst at Evolution, added: "If confirmed, this will establish a higher trading range for the other water stocks. The biggest beneficiary would be Severn Trent, followed by United Utilities."
And so it proved, with water quenching investors' thirst all day. On the top tier, Pennon Group was the best performer and rose 25.5p to close at 540p. Severn Trent was not far behind, rising 45p to 1170p. Investors refused to be daunted by a note from Merrill Lynch saying that "such speculative stories appear at least twice a year". Northumbrian Water's shares closed 30.4p higher at 289p.
For once, British Airways had reason to thank Ryanair for a positive read-across. An upbeat statement from the Irish budget carrier, reports that its planned alliance with American Airlines and Iberia was moving ahead, and an upgrade from Goldman Sachs all helped to increase its share price.
Ryanair said it had raised its profit forecast and its fares had not declined by as much as the market expected. As a result, Goldman upped its target price for BA from 253p to 265p, which helped to lift shares in the UK's flagship airline, which has not had an easy few months, by 6.8p to 213p.
A broker note from Royal Bank of Scotland sent Rolls-Royce shares into overdrive. The aerospace engineer rose 7.5p to 487.3p following a note entitled "Success breeds success". Sandy Morris, an RBS analyst, said: "We expect Rolls-Royce to enjoy a good recovery in its civil aerospace after-market business from the second half of 2010, and some recovery in its civil aerospace original equipment revenues from 2011." He increased the target price from 430p to 700p to bring it in line with consensus.
RBS enjoyed a bit of a boost itself. The bank's shares rose by 2.5p to 34.8p after it unveiled a retail-targeted bond on the platform launched by the London Stock Exchange yesterday.
The worst-hit financial stock was Schroders. Credit Suisse cut the asset manager's shares from "outperform" to "neutral" and lowered the target price from 1415p to 1350p, saying "moderating flows will cap any further positive earnings revisions". Credit Suisse said its earnings-per-share downgrades resulted from lower assumptions about net flows and margins as well as higher costs. The shares plunged 35p to 1211p.
BT Group also fell after the shadow Chancellor, George Osborne, said the Tories might allow rivals telecoms operators to connect their fibre-optic networks to BT exchanges to break its monopoly. But the news did not prove a huge blow to traders and BT's stock retreated by 1.1p to 136.5p.
Investec put in a good performance on the second tier after its asset management division announced strong net inflows in the nine months to the end of December. They hit £3.6bn, with £1.5bn coming in the last three months. The chief executive, Hendrik du Toit, was also confident of a strong end to the year. Investec's stock rose by 13.8p to 440.1p, days after the group issued its nine-month update, which led Numis to raise its recommendation from "hold" to "add".
A strong note from Deutsche Bank lifted housebuilders. The top performer was Barratt Developments, which was given a "buy" rating and a target price of 193p. Deutsche rated three other builders as "buys" and three as "holds".
In the wider market, another housebuilder Galliford Try rubber-stamped a deal to build a new library in Worcester and a history centre for Worcestershire County Council, but news of the £60m private finance initiative did not prevent its shares sliding 3p to 314.75p.
The brewer and pubs operator Marston's was among the biggest fallers –dropping 2.1p to 85.8p – after UBS removed it from its "most preferred" list of European leisure shares, following an update on Friday which said sales had risen over Christmas but were knocked back by last month's cold weather.
Shares in Timestrip, which makes "unique label technologies" to show how long a product has been in use, closed 0.15p higher at 1.67p after the company said it had won a contract to make labels for toothbrushes.
It was all go at Catalyst Media, which owns a 20 per cent stake in Satellite Information Services and is producing an online gambling game. The group said it had launched a strategic review that could involve a sale of the company. The shares rose 14p to 83.5p.
SThree's stock survived a pounding despite saying its profits had fallen by two-thirds last year. The recruitment agency said it was optimistic that some of its markets were stabilising, and its shares rose by 7.6p to 312.4p.