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Clean bill of health for US boosts markets

UK blue chips rise 4%; US industrial output expands; Fears of double-dip recession ease

Philip Thornton,Economics Correspondent
Friday 16 August 2002 00:00 BST
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Shares on the London stock market surged yesterday as mixed US economic news failed to jolt investors' relief that corporate America had given itself a clean bill of health.

However, the gains may be short-lived. The end of the trading session came just minutes before a shockingly poor US business survey sent a wave of panic over a possible "double dip recession" through Wall Street.

The FTSE 100 index leapt almost 4 per cent to a five-week high after a similar rally in New York on Wednesday night after 600 of America's largest companies swore their financial accounts were accurate.

The London rebound sent the FTSE 100 back over the 4,300 level that analysts see as a staging post on the road to a sustained recovery. It closed up 156 points, or 3.8 per cent, at 4327.

The rally was sparked by widespread relief that the vast majority of US companies had been able to meet a deadline of 9.30pm UK time on Wednesday to certify their accounts.

"What is surprising is that this [rally] is based on the absence of more US companies coming out with bad news and their ability to say that their accounts are true and fair," said Hilary Cook, a director of Barclays Private Clients. "It is indicative of how nervous the market is that this could make it bounce so much."

She warned investors against buying in the belief that the rising market was a one-way bet, saying that the markets had ignored a run of bad news from US Airways, AOL Time Warner and Vivendi. "Stock picking has never been more important. I think the market could retest the lows," she said.

An unexpected slump in a key survey of manufacturing industry in three US states wiped a 110-points gain on the Dow Jones in afternoon trade, though it later swung up again, ending 75 points higher at 8818.1.

The Federal Reserve Bank of Philadelphia said its business conditions index for August went negative for the first time this year. This is the second month in a row the "Philly" has stunned the markets. "What a tumble!" said Ian Morris, US economist at HSBC. "Fear of a new manufacturing recession may intensify." Markets on both sides of the Atlantic are now focused on a crucial US consumer confidence survey, from the University of Michigan, released this afternoon.

The Philly survey wiped out some of the positive reaction to news of an unexpected boost in activity in America's industrial sector.Total output by manufacturers, mines and utilities rose 0.2 per cent in July, scotching forecasts of a fall.

The rise was driven by the largest output from US car factories in two years and a 2.3 per cent increase in utilities' output as a heat wave boosted electricity demand for air conditioners.

Away from those areas manufacturing production rose just 0.1 per cent. However, the number of US workers filing new claims for unemployment benefits rose more than expected last week, implying firms were still laying off staff.

"The signs of a slowdown are apparent in [the Philly] as well as the industrial production numbers," Kurt Karl, chief US economist at Swiss Re said. "The economy hit a little bit of a lull in the summer, but I don't think it is particularly worrisome. But it is consistent with moderate to weak economic recovery."

On Tuesday the Fed took a step toward lowering US interest rates by saying the risks of an economic slowdown outweigh the threat of inflation.

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