World equities soar on hopes of rate cuts: Footsie again hits record - Wall Street strong - Tietmeyer fuels speculation about interest levels

BRITISH, Continental and Asian stock markets yesterday bounded to new highs, driven by hopes of lower European interest rates and the continuing flood of US funds into foreign markets.

The FT-SE 100 index of leading UK shares climbed to yet another peak just ahead of the sixth anniversary of the 1987 stock market meltdown. The index ended at 3,120.8, a gain of 34.5 points and only a touch below the day's best levels.

Analysts cited hopes of lower European rates, helped by recent rate cuts in Denmark and Spain, and an eventual cut in Britain. Also contributing to higher London share prices were a sharp surge in Hong Kong stock prices, a strong finish on Wall Street on Thursday night, and speculative fever after the US mega-merger between Bell Atlantic and Tele-Communications. The US Dow Jones Industrial Average closed just 8.10 points up, at 3,629.73.

As hopes rose for a new round of European rate cuts next week, speculation persisted that British rates will also be reduced around the time of the Budget on 30 November. Official figures this week renewed worries that UK inflation may be ticking upwards after a spectacular run of good news since sterling left the exchange rate mechanism in September last year. But the patchy recovery means this week's inflation figures have failed to dent hopes of a base rate cut altogether. Sterling ended little changed at DM2.4420 but a pfennig below the day's best levels.

Speculation over imminent European rate cuts was further fuelled by an upbeat statement from Hans Tietmeyer, the new Bundesbank president, who said the German central bank would hold to a steady, clear and stability-oriented monetary policy 'which would of course not rule out further cautious interest rate cuts when conditions are right'.

In Frankfurt, the DAX index finished 24.96 points higher, at a fresh peak of 2,015.03. The Dutch, Swedish, Swiss and Belgian stock markets also hit new highs.

Analysts expect the next set of German inflation and money supply figures to show subsiding pressures on prices, with consumer price inflation dropping decisively below 4 per cent. But they also believe the German central bank will nudge the 6.7 per cent securities repurchase rate down before a cut in the more significant discount rate, now 6.25 per cent, which is probably weeks away.

Low inflation rates eleswhere in the world yesterday helped to drive bond prices higher, with bond yields in Wall Street hitting new record lows.

Signs that US inflation remains firmly subdued came in official figures showing that consumer prices remained unchanged last month. This left inflation running at an annual rate of 2.5 per cent in the first nine months against a 3.8 per cent high earlier this year. Other US economic news showed the trade deficit narrowing by around dollars 700m to dollars 9.71bn in August, while industrial production edged up 0.2 per cent in September.

Rising bond prices lifted stock prices in their wake. In Asia, the Hong Kong and Singapore stock markets closed at new peaks, although Hong Kong stocks were helped by reports that Chris Patten, the Governor, is trying to break the deadlock in negotiations with China over the future of democracy in the colony.

Belgian and French stocks also climbed higher amid speculation over lower rates. The prospect of an imminent fall in rates left the Belgian and French currencies under pressure yesterday. The French franc ended at Fr3.5409 to the mark, little higher than its worst- ever level after Edouard Balladur, the French Prime Minister, suggested the government was relaxed about the weaker franc.

'It is a question of the undue strength of the mark and not excessive weakness of the franc,' Mr Balladur said.

The Belgian franc ended at almost 22 to the mark despite central bank intervention, and was little changed on yesterday.

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