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FTSE 100 posts strong gains as optimism returns to world markets

News that Greek banks Alpha and EFG Eurobank were merging, as well as surprisingly strong US consumer spending figures, both boosted market confidence

The FTSE 100 soared 150 points this morning, a rise of almost 3%, as London caught up with strong gains on Wall Street and in Asia after the bank holiday weekend.

Banking stocks led the way, with Royal Bank of Scotland, Lloyds Banking Group and Barclays up 12%, 8% and 8.4% respectively. The blue-chip index hit 5,283 in early trading.

There were gains elsewhere in Europe, with France’s CAC index 1% higher this morning, and the Dax in German rising 0.8%.

The US Dow Jones industrial average had closed 2.3% up on Monday, fuelled by a rally in financial stocks. News that Greek banks Alpha and EFG Eurobank were merging, as well as surprisingly strong US consumer spending figures, both boosted confidence. Overnight, Japan’s Nikkei rose 1.16%.

Although Federal Reserve chairman Ben Bernanke did not announce more quantitative easing during his speech at Jackson Hole last week, markets have bounced regardless.

“Despite the initial disappointment of no QE3 announcement at Jackson Hole last week, markets took encouragement from Bernanke’s announcement that he would extend next month’s Federal Open Market Committee meeting to two days to fully explore and discuss any range of options for, and against further stimulus,” said CMC analyst Michael Hewson.

“It seems that markets have taken this to mean that we could well see further stimulus, despite the significant barriers against it, both political and fiscal.”

Better news from the eurozone periphery, as well as strong US data, have also fuelled the surge.

News of the Greek bank deal prompted the Greek equity market to rise 14%, its largest one-day rise in more than 20 years.

The deal creates Greece’s biggest bank, and was sealed with help from Qatar. Greek bank stocks shot up 29% in the wake of the announcement, prompting a rally in financial stocks around the world.

US consumer spending meanwhile rose at its fastest pace in five months in July, with strong demand for cars in particular.

Hewson said: “The market took in its stride IMF chief Christine Lagarde’s warning that European banks needed urgent recapitalisation, and that the crisis was entering a dangerous new phase. This call was firmly rebuffed by EU officials with EU commissioner Olli Rehn insisting that the health of EU banks had improved over the past year. To look at yesterday’s price action markets seem to concur.”

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