Shares in London surged by over 8 per cent today, following strong rallies in New York and Tokyo on hopes that central banks will act to cut interest rates.

Only a handful of FTSE 100 companies were trading in the red as leading blue chip shares climbed 313.16 points to 4,242.54, with insurance groups Old Mutual up 30.26 per cent and Aviva up 25.1 per cent. Commodity stocks including Xstrata also were amongst the top performers. Shares in Xstrata soared up 25.5 per cent.

The expected move sent the dollar down against sterling to $1.64 - an improvement for the pound which fell as low as $1.55 in recent days as fears of a recession in the UK sent investors piling into the greenback.

In Paris the CAC gained 9.23 per cent to 3,402.57 points. Shares in Madrid and Milan ended the day with gains of 9.42 per cent and 9.87 per cent, respectively.

By contrast, the Frankfurt DAX fell 0.45 per cent to 4,801.87 with Volkswagen Europe’s biggest faller diving more than 40 per cent after Porsche took steps to ease a squeeze on short-sellers that had more than quadrupled the stock in days.

Last night, Wall Street rose by 890 points — the second largest one-day gain on Dow Jones as confidence grew that the US Federal Reserve will cut interest rates by half a point to 1 per cent later today. At lunchtime today, after a volatile start, the Dow was trading up 76.22 or 0.84 per cent at 9,141.34.

In Tokyo, the Nikkei rose 589.98 points to finish at 8,211.90, accompanied by unsourced stories in the local financial media claiming that the Bank of Japan was planning to make an interest rate cut later this week — a 25 basis-point drop that would take rates to just 0.25 per cent.

Although analysts believe that such a cut would make little practical difference to the Japanese economy, the psychological effect, particularly on the yen, could potentially stabilise the unprecedented volatility of markets.

As the currency slipped back down to the Y97 level against the US dollar, the threat to Japanese companies appeared to lessen.

In London, mining stocks were bolstered by the falling dollar against sterling and most other currencies, which drove up commodity prices.

There is also talk that pension funds are switching into equities and out of bonds to rebalance their portfolio at the end of the month.

The dramatic fall in the value of equities and rise in government bonds in October means funds that have promised a fixed proportion of each asset have to reshuffle.

In the UK further cuts are also expected next week but traders are wary about the sustainability of any bounce. Volumes have been thin in recent days with most trading floors half empty for the school half-term.

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