ROBUST ADVANCES SIGNAL RETURN OF RISK APPETITE

Global stock markets rebounded yesterday as fears about a possible worldwide flu pandemic subsided in spite of a rising death toll in Mexico.

UK and European shares reached their highest levels for 2½ months, and there were firm gains on Wall Street and in Asia.

Peter Oppenheimer, strategist at Goldman Sachs, said global stock markets had passed their cyclical low and equities should provide the strongest returns of any asset class over the next 12 months.

He said that while bond markets could benefit from non-conventional policy actions in the short-term, over the next 12 months there was a risk that yields would be repriced higher.

But he also warned of “potential downside risks” for equities related to first quarter earnings, stress-tests for US banks and a slower economic recovery compared with past recessions.

In London, the FTSE 100 rose 2.3 per cent. In Europe, the FTSE Eurofirst 300 closed 1.9 per cent higher, helped by a recovery for banks and airlines. By mid-day in New York, the Dow Jones Industrial Average was up 1.9 per cent while the S&P 500 index rose 1.2 per cent.

Wall Street rallied ahead of the Federal Reserve's monthly meeting, in spite of disappointing data that showed the economy continued to shrink rapidly in the first quarter, contracting by an annualised 6.1 per cent after a fall of 6.3 per cent in the final quarter of 2008. The decline was worse than expected with exports and investment both falling sharply. But consumer spending rose 2.2 per cent and although inventories saw a record fall, analysts said production could rebound if the destocking cycle had run its course.

“This was a disastrous report in many ways,” said Ian Morris, head of US economics at HSBC: “What was shocking was the scale of some of the declines in the investment portions of activity.” However, Mr Morris said that there was a “very good chance” that inventories and consumer spending would rise in the second quarter, helping the economy to register positive growth.

Japan's stock market was closed for a public holiday yesterday but equities elsewhere in Asia moved broadly higher. In Korea, the Kospi index rose 2.9 per cent, helped by gains for exporters after better-than-expected trade data for March. Hong Kong's Hang Seng index and China's Shanghai Composite both gained 2.8 per cent.