Shares break free from trading range

The London stock market hit a two-year high yesterday, finally breaking out of the tight trading range it has held for most of the year and sparking hopes of a revival in share prices.

The London stock market hit a two-year high yesterday, finally breaking out of the tight trading range it has held for most of the year and sparking hopes of a revival in share prices.

The FTSE 100 index of the largest UK companies' shares rose 34 points, or 0.8 per cent, to 4,591, its highest since July 2002. The index has added 1 per cent since last Friday, its fourth weekly gain in five.

It marks the end of a nine-month period when the blue chip index has swung between 4,300 and 4,550 without managing to break out into new territory. "The market has traded in an extraordinarily tight range - one of the tightest we can remember," said Hilary Cook, the head of strategy at Barclays Private Clients. She said yesterday's rise, which was not sparked by any specific news, was a recognition that recovery in Asia Pacific and Europe would feed through into corporate profits.

Mike Lenhoff, the chief strategist at Brewin Dolphin Securities, said a number of factors had slotted into place to support the market, which has risen 200 points in the past month.

The fall in the pound, a drop in oil prices, speculation that interest rates were near their peak and upwards revisions to earnings estimates had changed the mood. He said the UK was best placed to benefit as the FTSE 100 was heavily focused on dollar-based markets such as the US, China and Hong Kong and would benefit from weaker sterling.

In addition, most of rate rises had already taken place in the UK but were still ahead for the US and European markets.

Peter Oppenheimer, head of European strategy at Goldman Sachs, sounded a note of caution, saying history pointed to a rough ride for world markets.

He said the FTSE 100's narrow trading was a typical pattern for a market that had just enjoyed a strong rebound following a deep bear market. Analysis over more than 100 years showed markets often endured a "flat and skinny" period - low returns and low volatility - as share prices consolidated after an initial recovery. This was then succeeded by a "flat and fat" period when stock markets saw large swings up and down, but without posting any long-term gain.

Mr Oppenheimer said there were more reasons for optimism in the UK. "People are getting increasingly hopeful that rates may be near their peak and therefore that sterling may have peaked," he said.

However, Mr Oppenheimer said global markets generally faced negative risks, such as high oil prices, imbalances in the US economy, rising rates and a downturn in profits growth.