THE decision by the new Labour government to effectively cede interest rate decision-making to the Bank of England triggered an explosion of big gains across equities and gilts yesterday.
The shift of policy on interest rates overshadowed the chancellor's decision to lift British interest rates by 25 basis points after bringing forward his scheduled meeting with Mr Eddie George, the governor of the Bank of England, which had been scheduled for today.
When the dust settled on a day of intense activity in stock markets, the FTSE 100 was left with a gain of 63.7 at a new record closing high of 4519.3, after hitting an intra-day peak of 4525.6.
The most startling advances in the stock market came in gilts where longer dated issues rose by an at-most unprecedented 4 1/2 points, with 10-year stocks up by more than 2 points.
The gains in medium and smaller-sized stocks were nothing like as good as those in the leaders. The FTSE 250 finished a net 22.1 ahead at 4520.2, but remained over 200 points shy of its all-time intra-day and closing levels.
Similarly, the SmallCap index nudged up 5.7 to 2301.2, around 75 points off its previous record.
The only slight disappointment for the market was that the equity market's excellent performance was not matched by a substantial increase in the volume of retail business transacted.
Turnover at the 6 p.m. cut-off point was 761.8 million shares, well up on usual levels for the first trading session in the week, but still disappointing on a day when the FTSE 100 moved up 1.4 per cent to a new record close.
Adding substance to a splendid session for shares were the big gains scored by stocks on Wall Street where the Dow Jones Industrial Average climbed over 230 points on Friday and Monday, hitting new record closes in the process.
Wall Street came in strongly again yesterday, the Dow posting a 20-point advance shortly after the start of trading and adding to London's strength.
When the news of the interest rate rise and the shift of interest rate policy became known, equity marketmakers, stunned by the extent of the early advances in gilts, had no option but to hoist prices.
Even then, a flurry of sustained overseas buying propelled share prices even further, especially in the financial sectors, which traditionally react positively to strong bond markets.
Sterling also hit a new high on the Bank of England's index against a basket of leading currencies, before easing towards the close. There were worries across the stock market about the potential damage of a rampant pound to big overseas earners.
Of the handful of losers in the FTSE 100 the majority were overseas earners.
Marketmakers expected renewed overseas support for British markets. One senior trader said 4700 on the FTSE 100 was eminently achievable in the short term".
