UK markets rallied on Tuesday based on some promising US macroeconomic data, positive US earnings, and optimism that Spain may soon formally request a bailout.
Improving US macro data on retail sales, business inventories and consumer sentiment helped boost investors' outlook. Furthermore, a new Financial Times article is reporting that Spain is readying itself to apply for a bailout, which has created a ripple of relief amongst investors.
"The latest headlines from Madrid imply that a formal request for aid is inevitable," said Ashraf Laidi, chief global strategist at City Index. "Whether it takes the form of 'applying' for credit line under the €500 billion European Stability Mechanism (but not necessarily tapping it), or a full-fledged activation of the ESM, Spain is intending to stabilise market sentiment without triggering the Outright Market Transactions (OMT). It’s also been said Madrid is concerned that full ESM activation may erode resources for Italy in case a request is later made by Rome."
Banks and miners led the London rally higher, with shares in EVRAZ (EVR) and 
Lloyds Banking Group (LLOY) each rising by more than 6%. Royal Bank of Scotland (RBS) and Barclays (BARC) also notched gains of 4.4% and 3.9%, respectively.
US banks have also performed well this week as they report quarterly earnings that have generally beat market expectations.
"So far this week the big bellwether US equities have all posted expectation-beating results, with Goldman Sachs' (GS) positive report making it five out of five for the big US financial houses and painting a very encouraging picture," said Alastair McCaig, a market analyst at IG.
The FTSE 100 index rallied by 65 points, or 1.1%, on Tuesday. The index is now closed at 5,871. The mid-cap-tracking FTSE 250 index also shot up by 1.1% to close at 11,985.
On the economic front, new data shows the UK consumer price index (CPI) annual rate fell in September to 2.2%, meaning that general consumer prices are not rising as quickly as they had been in previous months.
"This [2.2% rate is] down from 2.5% in August. This is the slowest rate of inflation since November 2009," said Gerard Lane, an analyst at Shore Capital. "Against the 5.2% rate in September 2011, we would highlight the improvement in real incomes due to the fall in inflation over the past 12 months. This fits into a theme that has been of benefit to consumer discretionary spending in the UK: witness the pub and leisure activity in company announcements, and the general retail backdrop, which whilst challenging, is not as poor as it appeared a year ago, in our view."
