UK Stocks : FTSE 100 closes 1.2% up

German Chancellor Angela Merkel’s comments that her country stood ready to use the existing instruments already created in the euro zone to combat the debt crisis also helped investors to stay positive despite the gathering crisis in Spain.

Sectors, whose fate is linked with economic conditions, made solid gains, with the UK banking index, miners and energy shares up 1.5-2.5 percent.

However, investors hungry for hints of more stimulus from central banks were disappointed as the Bank of England (BoE) left its policy unchanged and U.S. Federal Reserve Chairman Ben Bernanke offered little to suggest that further monetary stimulus was imminent.

The FTSE 100 lost some shine in late trading and closed below a session high because a lot of investors had positioned for some support from the Fed and the BoE. But it was still up 63.68 points, or 1.2 percent, at 5,447.79 points, helped by China’s move to cut interest rates by 25 basis points.

The rate cut from China shows their ability to continue pulling the relevant levers to keep GDP (gross domestic product) on an expansionary path and the rhetoric coming from the European Central Bank regarding the future of Spain shows the euro zone isn’t set to break up any time soon, Mike Jarman, chief strategist at H2O Markets, said.

For the short term, we’re advising clients to have more of a ‘risk on’ mentality, but know the volatility is here to stay.

After the close, Fitch cut Spain’s credit rating by three notches to BBB.

China’s rate cut to shore up slackening economic growth was the first since the depths of the 2008/09 financial crisis. The consensus view had been that the central bank would refrain from an outright cut to interest rates in 2012.

The market also got some support from a UK survey showing May’s services purchasing managers’ index (PMI) unexpectedly held firm at April’s level of 53.3, showing moderate growth. The British Retail Consortium reported a stronger-than-expected 3.4 percent annual rise in the value of retail sales.

REBOUND FROM LOWS

Thursday’s finish for the FTSE 100 index was the highest closing since mid-May, a move which looked impressive given the fact that the market had slipped to a six-month low just last week on euro zone jitters, deteriorating economic numbers and Spain’s banking sector woes.

Risk sentiment has improved dramatically in the past few days as hopes of an EU deal to recapitalise Spain’s banks has attracted buyers back to equities, Angus Campbell, head of market analysis at Capital Spreads, said.

Charts showed the FTSE’s rebound from lows, which coincided with a 61.8 percent retracement of the rally from a low in August last year to a high in March, had improved outlook.

The test on the downside was accompanied by bullish divergence signals and that implies reasonable near-term upside. I am cautiously optimistic, but very nervous given the event risks which are on the horizon, Phil Roberts, chief European technical strategist at Barclays Capital, said.

There is a lot of resistance to overcome and it may just be that the market struggles to move aggressively higher in the near term. The obvious resistance zone is at around 5,580-5,590, which is a zone of support that gave way back in May.

Societe Generale said a monetary policy intervention, progress towards a European banking union, a victory of moderate parties at Greek elections and signs of economic recovery could trigger a rebound. It highlighted high beta assets, which tend to offer higher returns than the broader market during rallies and fall more sharply during corrections.

It said in a note that miner Kazakhmys offered the highest beta among stocks on the FTSEurofirst 300 at 2.94, suggesting its returns could be nearly three times higher than the market if there was a rally.

Royal Bank of Scotland and Barclays offered betas of more than 2, Thomson Reuters data showed. RBS jumped 5.3 percent, Barclays was 2.7 percent higher and Kazakhmys advanced 1.9 percent.

Among other movers, Johnson Matthey rose 4.9 percent after the world’s largest supplier of catalytic converters reported better-than-expected results, while Burberry rose 5.1 percent as Credit Suisse upgraded its rating on the luxury goods firm to outperform from neutral.