There was more severe pain for British equities yesterday with shares prices tumbling across the board for the second consecutive session as the market continued to react to Mr Alan Greenspan's speech to the US Senate.
The chairman of the US Federal Reserve warned of the inflationary dangers of rapidly expanding employment and demand, as well as stating that the risk of a pick-up in inflation out weighed the threat of a sharp economic slowdown.
And adding to the market's discomfort, he claimed that the level of stock prices may be hard to sustain.
With the threat of a rise in US interest rates, possibly as early as after the next meeting of the Fed's open market committee, scheduled for August 18th, hitting Wall Street overnight, London was under pressure throughout the session.
And it was not only the Greenspan effect that prompted big losses in London. Comments on Tuesday by Mr Barton Biggs, Morgan Stanley Dean Witter's global strategist, and by BT Alex Brown's pan-European equity strategy team added to a gloomy picture.
The Morgan Stanley guru forecast a 20 to 30 per cent fall by US stocks in the next six to nine months with European markets retreating 10 per cent. BT Alex Brown also forecast a 10 per cent drop in European markets.
The Dow Jones Industrial Average fell 105 points overnight and posted a further three-figure plunge during early trading yesterday, bringing increased downside pressure on a London market already buffeted by waves of selling.
There was further gloomy domestic economic news. Retail sales fell 1.1 per cent in June, with economists blaming the distraction of the World Cup and the poor weather for the decline, which was slightly more than the consensus forecast of a 0.6 per cent fall.
Some observers took the view that the fall in sales would lead to reduced pressure for a rise in British interest rates when the Bank of England's monetary policy committee meets on August 5th and 6th. Mr Ken Wattret at Paribas said there had been signs that consumer and service sector demand were cooling while the July retail price index data were better than expected.
"Our best guess remains that we see another quarter-point hike in rates next month," said Mr Wattret.
At the close of trading the FTSE 100 was down a further 143.1 at 5,989.6 for a two-day decline of 189.4 or 3.1 per cent.
The junior FTSE indices also fell sharply, with the FTSE 250 settling a net 44.4 off at 5,659.3 and the FTSE SmallCap 19.0 lower at 2.570.2.
It was not all sell-side stories in the market, however. One of the stock market's longest-running takeover stories came to fruition as US investment group Kohlberg Kravis Roberts put together a bidding consortium, including British insurers Guardian Royal Exchange and Royal & Sun Alliance, offering 200p a share for Willis Corroon. The Willis bid saw shares in Sedgwick, Britain's second biggest insurance broker after Willis, rise strongly on the view that it too will attract a predator.
Turnover reached a disappointing 832.4 million by 6 p.m.
