The FTSE soared past the 6000 mark on the first full trading day of the year with improving conditions in US and UK manufacturing plus general optimism surrounding equities sending the blue-chip index higher this morning.

US fundamentals improve

Further indications that conditions in the US are improving helped UK equities post a solid start to the first trading session of the year. The ISM Manufacturing report released yesterday showed manufacturing in the world’s largest economy increased to a reading of 57 in December from 56.6 the prior the month. The rise in the ISM manufacturing report comes after the Richmond Fed Manufacturing Index last week showed a larger than expected jump in manufacturing activity in December. In addition, construction spending increased 0.4% in November, providing further weight to the view that the US economic recovery is beginning to gain some traction.

The manufacturing sector is an important source of jobs for the US economy and therefore economists will be expecting that growth in the sector will eventually lead to more jobs being created. The US nonfarm payroll report this Friday may show an increase in manufacturing jobs after the November report showed 13,000 jobs were lost in the sector.

UK manufacturing at 16-year high

Investors in the UK also had reasons to be optimistic after the Markit/CIPS manufacturing PMI rose to 58.3 in December, the fastest pace of growth in over 16 years. November’s reading was also upwardly revised from 57.2 to 57.5. The resilience in manufacturing points to a UK economy that is continuing to recover, despite overhanging concerns that fiscal austerity may hurt the economy in 2011.

In fact, a survey conducted by the Financial Times showed the majority of economists polled expect the government’s austerity programme to remain on track in 2011. Concerns that the increase in VAT and slashes to public spending will drag the UK economy back into recession are receding as the economic recovery builds momentum. However, stubbornly high inflation and concerns that unemployment may creep higher are factors that will slow the pace of the recovery this year.

UK Equities

By 10.30am (London time) the FTSE 100 had gained 115.57 points (+1.92%) to 6015.51 and the FTSE 250 added 161 points (+1.37%) to 11719.80.

The rally in UK equities this morning was broad based with resource stocks, banks and retailers all contributing strongly to gains. Fresnillo topped the FTSE 100 index after rising 5.46% to 1759p this morning, while peers Xstrata and Kazakhmys rose 4.15% and 3.28% respectively.

BP jumped 4.93% to 488.5p bolstered by the recent gains in oil price and also reports that Royal Dutch Shell was considering making a takeover bid for BP during the wake of the Gulf of Mexico oil spill disaster.

Banking will be a sector to watch in 2011 after enduring a difficult year characterised by European debt worries, US mortgage headaches and financial regulation. ‘If you're looking for fresh opportunities in the market, near the bottom of the performance tables in 2010 are the obvious place to look,’ said Douglas Cliggott of Credit Suisse. [1] Royal Bank of Scotland, Lloyds Banking Group and HSBC gained 3.66%, 3.59% and 2.83% respectively.

Retailers also took part in the rally this morning, despite concerns that the VAT increase may present a difficult year for the sector. Home Retail Group climbed 4.88% to 197.70, NEXT added 2.43% to 2023p while Kingfisher edged 2.01% higher to 268.7p.

There is a general optimistic view that equities will perform well in 2011. Cyclical stocks such as industrials and the auto sector may outperform this year as the global recovery adds more steam. Growth in developing economies will remain strong, despite possible cooling in China, while an improving political landscape in the US, among other factors, is adding to investor confidence in the recovery. However, some of the gains in recent weeks may not last in the short-term as they seem to have been achieved off very low trading volumes. Investors should be wary that a pull-back may occur in the coming weeks as traders return to work and reposition themselves for the rest of the year.

US premarket

This afternoon, US factory orders are expected to fall by 0.1% when the figures are released at 3pm (London time), while the FOMC minutes will be available at 7pm. Later in the evening at 10pm US vehicle sales will be on tap which may show total vehicle sales of 12.3 million in December.

March Dow and S&P futures nudged higher this morning pointing to a positive to US equities open this afternoon. Dow futures were up 11 points (+0.09%) while S&P futures added 2 points (+0.16%).