Stock markets spike on shock good news from crippled Citi

Pandit's update revealing positive start to year cheers investors around the world

Share prices around the world made a rip-roaring rebound on news that Citigroup, the crippled giant of the US banking system, has had a profitable start to 2009 and that regulators are preparing new measures to ease the pressure on financial markets. In the UK, the FTSE 100 soared almost 5 per cent. By the end of a frenetic trading day, New York's Dow Jones Industrial Average was almost 6 per cent higher, while the technology-heavy Nasdaq market rose 7 per cent.

The rally had been sparked by the publication of a memo by Vikram Pandit, the chief executive, to Citigroup's staff overnight, which revealed unexpectedly upbeat news about the bank's finances. The company has three times had to agree assistance from the US government, including two infusions of taxpayer cash totalling $45bn, and there had been fears that it could be battered further as customers fall behind on their credit cards and recession-hit businesses default on their loans.

And yet in the memo, Mr Pandit said that the new year had begun well. "In addition to our strong capital pos-ition, I am most encouraged with the strength of our business so far in 2009," he wrote. "In fact, we are profitable through the first two months of 2009 and are having our best quarter-to-date performance since the third quarter of 2007."

Deposits at the retail bank were stable, he said, the investment bank was No 1 in the league table of merger and acquisition advisers, and all sides of the businesses were continuing to lend money to clients.

Citigroup shares surged 38 per cent. During last week's market rout, they had startlingly fallen below the $1 level, and last night stood at $1.45 – still 97 per cent below their 2006 peak. The fate of Citigroup has become totemic for the broader market, which fears that large parts of the US banking system might have to be nationalised if the economy does not recover as predicted. Ill-advised investments in mortgage derivatives blew a giant hole in Citigroup's balance sheet, while the deepening recession has weakened its core businesses.

With the financial crisis and the recession threatening to continue feeding off each other, the equity market sell-off of last week had continued into this Monday. In one go, yesterday's rebound snapped the US market back to its best level of the month, with the Dow ending up 379 points – 5.8 per cent – at 6,926.5. The Nasdaq closed up 90 points – 7.1 per cent – at 1,358.3; the S&P 500 gained 6.4 per cent to 719.6. Earlier, the FTSE 100 had closed up 172.83 at 3,715.23. In London, too, financial stocks had led the way higher. Insurers Prudential and Friends Provident were each up more than 20 per cent; Lloyds TSB shares rose 16 per cent.

Speculation about further regulatory moves to ease pressures in the markets was helping the bullish mood. In London, there was optimism that today's Bank of England operations to buy UK government bonds will not only drive down market interest rates but will also improve other measures of the health of the credit markets.

And in the US, the Securities and Exchange Commission is considering reinstating a rule that makes it harder to bet on falling share prices. The abolition of the so-called "uptick rule", which bars a trader from short-selling when the last movement in a share price was down, is blamed by many market players for increasing volatility.