Commodity stock gains lift City to new 16-month high

Economic optimism and signs of a return in takeover activity sent the FTSE 100 Index soaring 1.6 per cent to close 87.46 points higher at 5500.34 – a level not seen since before the Lehman Brothers collapse last September.

A surge in early trading on Wall Street spurred on London's New Year rally, with the Dow Jones Industrial Average up nearly 170 points soon after opening.

Reports of stronger manufacturing activity around the world as well as a rise in oil prices helped stocks gain ground.

Markets had already been given a boost by overnight news that China's manufacturing industry expanded in December at the fastest rate in 20 months.

This was followed by a US trade group report confirming that manufacturing activity expanded faster than expected in December, while a similar UK survey leapt to a 25-month high.

The US manufacturing sector grew at its fastest pace in nearly four years last month, its fifth consecutive month of expansion, adding to hopes of economic improvement in 2010.

But headwinds for the US economy remain, as a separate report showed construction spending fell in November to a more than six-year low, depressed by a decline in homebuilding.

While fuelling hopes for a better 2010, the news had little impact on the pound, which was unchanged against the dollar and down 0.9 per cent on the euro.

On the London market, commodity-based stocks continued to show strength after their festive rally thanks to oil prices ticking above 81 dollars a barrel.

The Footsie's strong session reflected hopes of a revival in merger and acquisition activity, following a multi-billion dollar move by Basel-based drugs firm Novartis for the Alcon eye care business currently majority-owned by Nestle.

In a quiet session for major corporate news, Royal Bank of Scotland was the leader after Exane BNP Paribas changed its rating from "neutral" to "outperform". The broker said it expected progress on asset disposals in the coming quarters and predicted that better economic conditions should attract investors on a fundamental rather than speculative basis.

RBS was up 27/8p to 321/8p, while Lloyds Banking Group lifted 3 per cent, or 15/8p, to 521/4p.

Oil and gas firm Cairn Energy was another top riser after securing a second rig for its Greenland drilling programme. Shares rose 223/8p to 355p, or 7 per cent.

Retailers were also doing well after broker upgrades from Societe Generale and Credit Suisse as well as early signs of decent Christmas trading.

Argos firm Home Retail Group was up 131/8p to 2955/8p after SocGen said it expected improved trends at Homebase, the DIY chain it also owns.

Meanwhile Kingfisher – owner of rival B&Q – was 73/8p better off to stand at 2363/8p as it benefited from Credit Suisse marking up ratings on a host of European non-food retailers.

Marks & Spencer was 103/8p ahead at 4123/8p. Analysts expect the first like-for-like sales growth in more than two years tomorrow when the firm reports Christmas figures.

Property firms dominated the fallers' board after a strong run over the festive period. Hammerson slipped 113/4p to 4121/4p.

The biggest Footsie risers were RBS, Cairn Energy, Smiths Group lifted 55p to 1069p and Eurasian Natural Resources advanced 45p to 960p.