Banks and other financial stocks, buoyed by central bank infusions of money into the system, helped the top share index rebound on Thursday with fund manager Man Group
London's blue-chip index <.FTSE> closed up 59.74 points, or 1 percent, at 5,931.25, erasing the 1 percent drop on Wednesday after downbeat comments on the U.S. economy from Federal Reserve Chairman Ben Bernanke.
U.S. data on Thursday was mixed. Figures showed the U.S. labour market healing but real spending was stagnant, while the manufacturing sector growth unexpectedly slowed in February.
The ongoing moderate recovery in the U.S. economy is still well in place and we would not read today's decline in the ISM as a sign of loss of momentum, Annalisa Piazza, analyst at Newedge Strategy, said.
Top gainer on the FTSE 100 was Man Group
Worries over Man haemorrhaging funds has seen its share price halve over the past year, but the results provided a boost for other asset managers, with Schroders
Equity derivative strategists at BNP Paribas said the flow of funds still favours cyclicals outperforming defensives, with inflows into bonds (sovereign and corporate) and cyclical/financial sectors outpacing flows into equities and defensive sectors.
The higher the outperformance, the greater the need for portfolio rebalancing/asset allocation. The trend continues to be your friend . for now, BNP Paribas said.
That was echoed in the performance of UK-listed banks, which have gained more than 30 percent since their November trough and were the strongest risers on Thursday following the fresh injection of cheap liquidity by the European Central Bank in the previous session.
BNP Paribas, however, said the two shots of three-year long- term money by the ECB, has prompted the risk premium across equities to plunge, meaning shares are looking less cheap.
The 'gravitational pull' exerted by de-leveraging pressures seems to have succumbed to unprecedented flush of liquidity. With the very dovish tones by the FED, BOE and BOJ, one should expect the path of least resistance for risk premium to be down (still), it said.
The tidal wave of liquidity has also driven down volatility <.VFTSE> as investors have become more convinced the financial system can be saved from collapse, with some analysts saying the extra cash should allow banks to deleverage in a more orderly fashion, therefore protecting the value of assets on their balance sheets.
The loose monetary policy environment has encouraged businesses to build huge cash piles, and with the macro economic environment improving and valuations still historically cheap companies are beginning to hunt for bargains.
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(Written by David Brett; Editing by Erica Billingham)