Libor and oil feel effects of growing confidence

Growing confidence that the global economy is on the road to recovery briefly sent oil prices to their highest levels of the year yesterday.

Meanwhile, borrowing costs in a key part of the money markets reached record lows as the three-month dollar Libor rate fell below 1 per cent.

Caution returned to equity markets, however, as Ben Bernanke, chairman of the US Federal Reserve, gave his first hints about the future of the US banking sector ahead of the results of tomorrow's stress tests.
He said he expected “significant opportunities” for banks to raise capital outside of government sources.

Mr Bernanke also said the Fed was thinking “very hard” about getting its exit strategy from credit markets right so as not to upset fragile but increasing confidence in the financial system.

Hans Redeker at BNP Paribas said: “As policymakers focus on the recent improvements in credit and equity markets as well as the slower pace of economic deterioration, signalled by survey data, we expect risk appetite to be supported.”

Purchasing manager indices from the US, eurozone and UK in the past week have shown that the rate of contraction in manufacturing activity has slowed markedly.

Yesterday's service sector PMI from the US also reflected a slowing decline in activity.

Data from China on Monday showed that its manufacturing purchasing managers' index bounced above 50, a level that shows activity expanded, in April.

Hopes that Chinese business activity could build momentum and increase demand for raw materials helped commodity markets higher, driving US oil prices to their highest level this year.

Nymex West Texas Intermediate hit a five-month high of $54.83 a barrel before easing back. Brent crude rose as high as $54.91 a barrel, its highest in three weeks.

On money markets, three-month dollar Libor fell below 1 per cent for the first time, shedding 2.06 basis points to 0.9862 per cent as credit markets continued to thaw.

The rate at which banks charge for three-month dollar loans shot up to 4.82 per cent last year as liquidity dried up after the collapse of Lehman Brothers.

Wall Street got off to a slow start. But the UK market had a good session, as it caught up with Monday's strong equity market gains in Asia and the US when the London Stock Exchange was shut for a public holiday. The FTSE 100 added 2.2 per cent.

Performances in the US, Europe and Asia were more modest. The Dow Jones Industrial Average was down 0.2 per cent by midday in New York, while the S&P 500 slipped 0.5 per cent.

The FTSE Eurofirst 300 index climbed 0.5 per cent, but this was largely because of the performance of the UK stocks listed on the index.

Both Frankfurt and Paris moved lower. Tokyo's stock market was closed for a holiday, but Hong Kong's Hang Seng climbed 0.3 per cent.