A fresh dose of economic reality drenched London's equity market yesterday, pouring cold water on an early burst of enthusiasm that saw the FTSE 100 index race up to yet another intra-day record.
The sharp reversal in British stocks came in the wake of worse-than-expected public finances and a worrying report from the British Chamber of Commerce, which warned of "meltdown" in the manufacturing sector because of the looming recession and the continuing strength of sterling.
And dealers continued to fret about the possibility of another rise in interest rates in the near future - possibly as soon as next month - in the wake of the latest disturbingly high increase in average earnings. Those fears were stoked up by Wednesday's news that average earnings had increased by 5.4 per cent over the year to April, well above forecasts.
Not even the successful placing of nearly £900 million sterling worth of Cable & Wireless stock was able to reassure investors.
The worry about interest rate prospects prompted some dire warnings from stock market observers. The strategy team at BT Alex Brown issued a note headlined "Rates are going up".
The broker said; "Financial markets had taken heart from lower-than-expected inflation data, believing that the risks of higher interest rates had disappeared. Big mistake. The outlook for UK equities is still fraught with considerable danger. Although the economy is slowing, Wednesday's earnings data suggest the labour market is failing to reflect economic reality. On this alone the monetary policy committee will vote to raise rates, while it also implies pressure on profit margins."
The stock market could not sustain its early advance as those predictions swept across the City's dealing rooms. And Wall Street added to the overall uncertainty in London, kicking off the US session with modest gains, only to fall back into negative territory as London closed. The US market rallied again, however, to show a near 50-point advance around an hour after trading in London ceased.
At the finish, the Footsie was left with a 34.7 decline at 6,116.8, having swung in a near 100-point arc during the trading session.
At its best, just before the larger-than-expected public sector net cash requirement figure, formerly the public sector borrowing requirement, and the British Chamber of Commerce report, the index was driven to a record 6,180.4 during the first hour.
The two junior indices, the FTSE 250 and SmallCap, were never as volatile as the senior index. The 250 settled 0.6 off at 5,697.1, with minor attempts at a rally easily beaten off by persistent small sellers.
The FTSE SmallCap proved more resilient than of late, and remained in positive ground all day although it never looked like making substantial progress. At the finish, the index was 2.1 ahead at 2,583.7.
WH Smith, meanwhile defied the upward trend too, despite announcing record profits and reaffirming its intention of becoming Britain's leading popular bookseller. It lost 3p to 546 1/2p, warning that the World Cup led to disappointing sales in June.
Railtrack gained 2p to £15.67 after it promised an assault on delays and further improvements to track standards - dealers who take the train to work appeared to ignore the news that the number of delays caused by track and signalling problems had not fallen as quickly as last year.
On a day where several financial stocks took falls after a storming previous session, Britannic Assurance and Sun Life & Provincial both announced increases in new business.
Home collection group Britannic gained 19p to £12.61 1/2 p while its rival dropped 5 1/2p to 582 1/2p.
Ladbroke wilted 5p to 318 1/2p despite reports that monopoly regulators were considering quashing its bid for betting shops group Coral. The move could force Ladbroke in to a fire sale of the 833-shop chain.
Turnover in equities topped the one billion mark for the first time in weeks, eventually reaching 1.082 billion, amid talk that at least one sizeable programme trade had been transacted.
