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FTSE rallies near 4 as European leaders plan action

Article By: ,  Financial Analyst
September 27, 2011 5:27 PM

The FTSE 100 closed higher by a healthy 4% on Tuesday as traders bought into the heavyweight financial and mining sectors on expectations that Europe’s leaders will deliver action to curb contagion of sovereign debt.

However, volumes were not fantastic today and so this has likely exacerbated today’s gains, meaning we must restrain ourselves from reading too much into the sharp equity rallies just yet.

That said, with every stock on the FTSE 100 gaining, investors have had something to cheer today after last week’s dreadful market performance, though naturally traders remain on edge for some more wild price swings tomorrow.

2 likely phases of the rally
There are likely to be two phases of the rally we are seeing in equity markets this week.

The first phase, which we are in right now, is based on optimism and relief that Europe’s leaders finally recognise the danger that is engulfing stock markets and economies in the region and is prepared to implement strong and co-ordinated action to contain contagion of debt and beef up bank liquidity within the region.

The second phase will come when the market actually sees what actions are being planned and assesses whether they are both credible and realistic. Considering that today we have seen a firm quashing of earlier speculation that the European Financial Stability Facility (EFSF) will be increased to €2trillion, what we may actually see in terms of a rescue plan remains particularly clouded. As such, investors continue to be sensitive to news and speculation whilst the gains we have seen remains open to reversal.

Miners rebound
A recovery in the miners has been key today, with the mining sector rallying a healthy 7.7% after metal prices rebounded from a dire few weeks trade that saw both gold and silver prices plummet.

The bounce in metal prices has attracted bargain hunters into the mining sector, who have moved to pick up some of the more badly beaten stocks such as Vedanta Resources and Antofagasta on expectations of a small recovery in prices. Both aforementioned stocks topped the FTSE gainers list as a result, rallying 11% and 10% on the day to mark a fantastic session for UK listed miners.

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