The FTSE 100 staged a strong rebound this morning, despite the UK economy expanding at half the rate expected in the first quarter.

The Office for National Statistics (ONS) today reported that the UK economy grew 0.2% in the first quarter of this year, trailing the 0.4% median expansion shown in a Bloomberg survey of estimates. The ONS blamed the weak growth on inclement weather conditions, which depressed domestic output in the retail and industrial sectors.

On a positive note, the report showed manufacturing output growing by 0.7% over the quarter, while the utilities sector saw output increase 2.5% over the same period. The bulk of growth came from the business and financial services sector, however, which grew 0.6%. Bucking the trend was distribution, hotels and restaurants, which contracted by 0.7%.

Sterling immediately reacted to the news, falling broadly, as it suggests the BoE will have to keep interest rates low for a while longer. In contrast, UK equities were unscathed and rallied to higher levels following the weaker-than-expected UK GDP figure, as investors were content to see a robust recovery in manufacturing and financial sectors continuing. One must also consider that the ONS tends to be rather conservative with its preliminary data anyway, so upward revisions are a possibility in my opinion.

Meanwhile, separate data released today signalled that the economic recovery in Germany, Europe’s biggest economy, will accelerate. An official report showed German business confidence surging more than anticipated this month as a result of flourishing exports growth and warmer weather conditions. The Ifo institute said its German business climate index jumped to a two-year high of 101.6 in April from 98.2 the prior month, exceeding the 98.7 median estimate shown in a Bloomberg survey. Germany’s current situation index rose to 99.3 from 94.5 and a gauge for future expectations advanced to 104 from 102.

‘German businesses seem to be untouched by these downbeat scenarios,’ said Carsten Brzeski of ING Group. ‘If the real economy now follows up on confidence indicators’ promise, the near future looks very bright.’ [1]

Another report showed EU industrial new orders soaring ahead of expectations, up 1.5% in February. This took the year-on-year rise up to 12.2% from 7% in January.

A softer-than-expected speech about US banks sector reforms by US President Barack Obama last night, along with news that Greece are seeking to activate the EU and IMF’s €40 billion rescue package, also helped restore confidence today. Yesterday, Moody’s Investors Service downgraded Greece’s credit-rating by one notch from A2 to A3 following an upward revision in the embattled country’s fourth-quarter deficit.

‘The Prime Minister is expected to make an announcement shortly,’ a Greek government official who requested anonymity told Reuters today. This report helped the euro and European stocks rebound.

By 10.45am (London time) the FTSE 100 was 48.10 points (+0.85%) above its previous close at 5713.43, while the broader FTSE 250 Index was 109.81 points (+1.05%) higher at 10545.42.

‘We remain positive about the outlook for UK equities,’ wrote JPMorgan Chase & Co in a report distributed today. We ‘consider the risks to current bottom-up profit estimates to be weighted to the upside.’ [2]

The blue-chip index was also lifted by a strong rally in the banking and mining sectors this morning.

Royal Bank of Scotland was the sector’s best performer so far, up 2.9% to 55.4p following another broker upgrade – with this the third time in a week that RBS has been upgraded by a large broker. Analysts at Barclays Capital today raised their rating on the stock from ‘equal-weight’ to ‘overweight’ and lifted their price target on the stock from 34p to 70p – representing a potential upside of 26% on the current price. Meanwhile, Lloyds gained 2.1% to 67.88p after Barclays raised its price target from 53p to 65p. [3]

Support also came from the heavyweight mining sector, which saw gains ranging between 0.4% and 2.4% this morning.

Elsewhere, Carnival rallied 4.1% to 2803p, as investors expect the cruise operator to benefit from the ash cloud which closed much of Europe’s airspace over the past week.

Looking ahead to the US, investors should watch out for the durable goods orders and new home sales data scheduled for 1.30pm and 3pm (London time) respectively. By around 10.45am (London time), June Dow and S&P 500 futures traded between 0.20% and 0.30% higher, suggesting Wall Street is gearing up for a positive start this afternoon.