MARKET REPORT : Uncertainty to keep investors on edge of their seats

The scent of lower interest rates wafted round the stock market, sending the FT-SE 100 index above 3,400 points for the first time since February last year.

Government stocks scored gains of up to pounds 1.

But shares and gilts are expected to fall sharply today following John Major's surprise resignation as Tory leader.

One of the market's greatest enemies is uncertainty and Mr Major has ensured that is one commodity that will not be in short supply until the leadership question is resolved.

But pre-Major, it was all sweetness and light, with the FT-SE 100 index up 25.5 points at 3,403.8. Rumours swept through New York that the Federal Reserve was pondering a rates cut, sending the Dow Jones Average to yet another peak, and hopes are high the Bundesbank will soon lower German rates.

Most leaders forged ahead, with Commercial Union, rallying on the back of gilts, up 18p to 608p.

British Aerospace had another solid day, up 15p to 575p. The market again displayed its satisfaction at the decision to withdraw from the VSEL battle and leave GEC to capture the prize.

There are suggestions BAe, in its quest for acquisitions and understandable desire to get out of the reach of GEC, could turn its attention to Lucas Industries, up 4p at 194p.

Alvis, the defence vehicle group, is also regarded as a possible target. The shares rose 4p to 101p.

3i, the investment group, made a big contribution to the day's turnover as the Bank of England and three of the high street clearers sold shares at 360p. The price rose 7p to 370p. 3i turnover was almost 242 million shares out of a total of 912 million.

Zeneca was back in the take-over frame with the shares up 19p at 1,095p; Smith & Nephew, the health care group was another dragged higher by bid speculation, gaining 4.75p to 185p in busy trading.

The by-now familiar story that Johnson & Johnson of the US is planning a strike went the rounds.

Bass, helped by Panmure Gordon support, climbed 10p to 614p and Scottish & Newcastle, firm at 574p, shrugged off a Kleinwort Benson sell comment.

Barclays, the banking group, hit earlier this month when its Barclays de Zoete Wedd securities arm sharply reduced its profit estimates, gained 18p to 704p as BZW put a buy recommendation on its parent's shares.

It seems the acquisition of Wells Fargo Nikko Investment Advisers, the US house, encouraged the bullish stance.

Abbey National added 3.5p to 493.5p although NatWest Securities cut its forecasts by 6 per cent to pounds 982m and pounds 1.06bn.

Thorn EMI, after a meeting with BZW, added 4p to 1,319p and Arjo Wiggins Appleton, the packaging and paper group, rose 7.5p to 259.5p as Panmure Gordon turned positive.

Williams Holdings dipped 7p to 330p following a James Capel switch from buy to hold.

Vodafone, down 4.5p to 235.5p, lost its US appeal, suffering from a rumoured Merrill Lynch downgrading and talk Goldman Sachs had stock on offer. Siebe, the engineer, slipped 14p to 634p with ABN Amro Hoare Govett negative in the wake of flat trading by Whirlpool, the US group.

Signet, the jeweller formerly known as Ratners, edged forward 0.75p to 12.75p as stories circulated it had arranged a new refinancing package with the banks.

Last month the group, led by James McAdam, defeated a break-up plan put forward by rebel shareholders. Next, the retailer, improved 8p to 337p with NatWest providing support.

Tadpole Technology, still it seems the favourite of many private shareholders, continued its erratic display, up 10p at 53p, a two-day recovery of 15p. Latest figures from ShareLink, the execution-only broker, show Tadpole was the favourite buy among its clients in the past week. British Steel was in second place.

XCL, the oil exploration group with interests in China, spurted 16p to 58 in busy trading. There was talk of a positive drilling report.

Forward Group, a printed circuit board maker, returned from suspension following the takeover of Exacta, which trebled its turnover. The shares closed at 380p against a 268p suspension price.

Toy Options, a new issue at 65p, ended at 68p. Stoves, the kitchen equipment group which made its debut on Wednesday, made further progress, up 2p at 183p.

YRM, the struggling building consultancy, experienced a 20 million share turnover with the price sticking at 1.25p. The group recently persuaded two of its landlords to take rent payments in shares. It has also raised pounds 2.8m through an open offer at 1p a share.