The FTSE continued to trade at a 21-month high today, after a surprise trading update from Lloyds sparked a rally across the banking sector.
Domestic risk appetite was also helped by a positive overnight session on US and Asian equity markets. A rumour asserting that the Federal Reserve was preparing to raise the discount rate before the next monetary policy meeting weakened US banking shares last night. Losses in the sector were offset by strength in industrial stocks, however, which gained on the back of data showing an ease in the cost of living, a stronger expansion in regional manufacturing activity and some evidence of a recovery in the embattled labour market.
By 10.30am (London time), the FTSE 100 was trading at 5685.25, representing a 42.63-point (+0.76%) increase from the previous day's close. Meanwhile, the broader FTSE 250 advanced 68.04 points (+0.68%) to 10072.22.
Although the FTSE is currently heading higher, it is likely to encounter a bout of volatility today since Wall Street and a number of major European bourses face the expiry of futures and options contracts – a process formally known as 'witching' – so be prepared, because we may very well see a few seemingly 'inexplicable' swings on the FTSE and other major equity markets today.
Banks dominated the FTSE leader board this morning, with bailed-out lender Lloyds Banking Group leading the pack, up 8.9% to 60.48p a share. This sharp upturn came after the bank announced that it expects to return to profitability 'on a combined business basis' in 2010, following two years of hefty losses.
Lloyds said profitability will be bolstered due to tight cost controls and lower bad debt charges, which have been lower than expected in the first 10 weeks of this year.
'In the first 10 weeks of 2010, the group's trading performance has been strong and we are pleased with the group's performance against each area of guidance,' the bank revealed in a regulatory statement with the London Stock Exchange. 'Costs have remained well controlled and are lower than the equivalent period in 2009. Impairment provisions are currently trending at lower levels than anticipated and as a result the group now expects to deliver a better impairment performance than previously guided, in both the retail and corporate businesses in 2010,' it added.
The positive statement unsurprisingly helped kick-start interest in the domestic banking sector today, helping Royal Bank of Scotland advance 5.6% to 44.34p, Barclays move 2.5% higher to 361.7p and HSBC climb 0.20% to 682p.
Life insurance stocks were also firmer today, with Old Mutual up 0.9% to 126p and Legal & General 0.84% higher at 83.65p. Aviva gained 0.20% after Aviva Investors, its asset management arm, announced plans to expand in the Asia-Pacific region and set up sales offices in Japan.
Resolution, meanwhile, benefitted from a Deutsche Bank report which said the company's results next week cast a spotlight on Resolution’s 'unreasonably cheap valuation'. The broker retained its 'hold' recommendation on the company, nevertheless.
Energy shares were also in demand, with BP gaining 0.70% to 637.3p and Royal Dutch Shell rising 0.4% to 1959p on the back of speculation that Royal Dutch Shell and PetroChina would sweeten their joint $3 billion offer for Australia's Arrow Energy.
Elsewhere, British Airways climbed 1.2% to 245.3p on hopes that a strike by cabin crew this weekend will be averted.
With no major economic data out in the UK or US today, the market may be influenced by news on the Greek deficit situation. On Thursday, the Greek prime minister warned that his country would not be able to make planned deficit cuts unless it can borrow money more cheaply. As a result Greece issued an ultimatum to European leaders, urging them to come up with a clear bailout plan by next week or else it will be forced to turn to the IMF.
Prime Minister George Papandreou said he expects European Union leaders to decide on the details of a support plan at the EU summit on 25 March. He said he wasn't asking for money but a clear mechanism for financial help in case Greece can't afford to borrow from markets. 'That alone would be enough to make sure that the speculators would be warned off,' he said. 'I think it's an opportunity to make a decision next week at the summit.' Papandreou said an EU failure to agree any plan would force Greece to go to the IMF, although hopefully 'that will not be necessary'.
However, Germany, the eurozone's biggest economy, is reluctant to support Greece and German Chancellor Angela Merkel even went as far as to suggest that countries that persistently break EU budget rules (such as Greece) should be expelled from the monetary union.
