The firm tone in London's equity market over the previous two sessions was reversed yesterday as jitters over the prospects of a rise in US interest rates returned to unsettle European bourses. There was also an element of unease ahead of the Bank of England's quarterly inflation report due this morning.
But the weakness in London was confined to the leaders, represented by the FTSE 100. The rest of the market, comprising the FTSE Mid-250 and SmallCap indices, was never really under any downside pressure, apart from the very outset of trading when the Mid-250 index spent the first 30 minutes of the session showing a marginal fall.
On the contrary, the FTSE Mid250 and SmallCap indices marched on to fresh intra-day and closing records. The Mid-250 gained a further 7.3 at a closing peak of 5,779.7, having hit an intra-day record of 5,781.7, while the SmallCap jumped 10.2 to a record close of 2,7239.1, after touching an intra-day peak of 2,739.4.
At the close, the FTSE 100 index had given up all and more of Monday's advance, finishing 71.0 lower at 5,956.7. At its worst, the index was down 73.0.
The US Federal Reserve's open market committee meets in Washington next Tuesday to determine monetary policy and a rise in rates is seen by some as a possibility.
Hefty losses in London's frontline stocks came in the wake of a disappointing finish to Monday's session on Wall Street, where the Dow Jones Industrial Average, up 100 points in early trading, fell away to finish only 36 ahead. Dealers in London were quick to point out that the S&P 500 index, viewed as much more representative of the US market, finished the day showing a small decline. Wall Street gave no real support yesterday, posting a 30-point decline not long after trading began.
There was further uncertainty for the British market from the weakness of the US Treasury bond market overnight, where the yield on the long bond moved back above the 6 per cent mark. This week sees important economic data, including retail sales figures, and producer and consumer inflation news.
British gilts lost ground in the wake of the US bond market's falls, adding to the pressure on equities.
The recent strong flow of corporate activity continued yesterday with US paints group PPG confirming market suspicions that it had made a takeover approach to Courtaulds in conjunction with Donaldson Lufkin and Jenrette, the US investment bank.
There was plenty of bid action among the small caps, where takeovers were announced by Gibbon Group, the printing inks group, Capital Group, the security and investigations company and Brunner Mond, a chemicals group.
Senior traders insisted that the FTSE 100 would be sustained by continuing takeover speculation and that the Mid-250 and SmallCap indices would be driven by actual activity.
