Big round numbers were beginning to look increasingly remote yesterday as the Footsie retreated further from the 5,000 level and the Dow Jones Industrial Average backtracked from 8,000. Fundamental news was thin on the ground but, following Friday's wild, derivatives-based ride in the UK, dealers were maintaining very short positions ahead of today's Humphrey-Hawkins testimony by Mr Alan
Greenspan, the chairman of the US Federal Reserve.
In December, Mr Greenspan's comments about "irrational exuberance"
in financial markets produced the biggest one-day fall in the FTSE
100 index since June 1994. This time, London was leaving very little to chance. Prices were chopped from the start and the Footsie opened
18 points lower to establish a steady downward trend.
The derivative contract on the underlying cash index was priced throughout the session at a discount to its estimated fair value and government bonds were weak across the board.
Further pressure came from the market's recent star sectors -
banks and pharmaceuticals - which ran into profit-taking.
British Telecom was another sizeable casualty, amid continuing worries over its planned merger with MCI of the US.
Footsie headed down towards 4,800 and bounced off that level in mid-morning.
Then, a lunchtime rally was undermined by another weak early showing from US equities. The Dow Jones Industrial Average was off more than 40 points in the first hour of trading - adding to Friday's
130-point slide - and Footsie dropped again to record a slump of 200
points from its peak on Friday morning.
Moreover, while turnover appeared impressive at 1.36 billion shares by 6 p.m., half of that figure represented a share buy-back from Thorn.
Finally, figures from France highlighting the public sector deficit added to worries about a weak base to European Monetary Union and were seen as maintaining upward pressure on sterling.
Footsie closed 71.5 off at 4,805.7. But the second-line indices, which have ignored the recent rallies, held up comparatively well.
The FTSE 250 ended 20 lower at 4,464.1 and the SmallCap index closed only 6.1 off at 2,188.5
Several strategists remain optimistic about the UK market in an international context despite the seemingly demanding valuations. BZW
says: "Buoyant world liquidity is seeping into the UK market through its impact on those sectors which are priced off global benchmarks.
"Domestic liquidity conditions are also supportive. Institutions, already awash with cash, are facing strong inflows, a shrinking gilt market and no net issuance of equities." Traders were also sanguine about the correction. One senior institutional sales specialist said:
"We tried to break through 5,000 three times on Friday and failed. So now we are consolidating. We have had a good run but there is no scent of a crash." - (Financial Times Service)
