Rally runs out of steam

The rally on the London stock market ran out of steam yesterday, as weakness on Wall Street, strong economic data and worries about Russia and Venezuela weighed on sentiment.

The FTSE-100 index ended 26.9 points lower at 5,667.4, although this was off the low for the day of 5,631.8.

The blue-chip index had looked like continuing its recent rally in early trading, especially as Asian markets had been broadly positive. At 9.10 a.m., Footsie was 12.5 points ahead at 5,706.8.

Then the economic data was released. The estimate of gross domestic product growth in the second quarter was left unchanged at 0.5 per cent. Consumer spending slowed a bit over the three months and surveys yesterday indicated that consumer confidence was at its lowest level for two years.

But broad money supply (M4) figures were much stronger than expected, rising 1.5 per cent month on month and 10 per cent year on year with a big surge in private sector bank lending.

Coming as they did after Wednesday's stronger-than-expected retail sales numbers, the figures did little to increase optimism about the outlook for interest rates.

There were no fresh bids to keep the market bubbling yesterday, so London was prey to international influences. In Russia, there were worries about bank failures while rumours that Venezuela could devalue its currency, while officially denied, caused a sell-off in Latin America.

On Wall Street, the Dow Jones Industrial Average was off 50 points for much of the New York morning.

In Britain, the medium- and smaller-sized stocks were lower on the day, with the FTSE Mid-250 index off 8.8 at 5,159.3 and the SmallCap down 4.7 at 2,322.2. Volume was 757.2 million shares by the 6 p.m. count, with BP and Shell active again.

Two mobile phone companies were amongst the market's top performers after Vodafone left analysts confident about growth in subscriber numbers.

Vodafone was up 43p at 903p, while rival Orange gained 15p to 789p.

Life insurers remained popular following the takeover bid for London & Manchester by Friends Provident. Rumours of a bid for Norwich Union by Halifax are also doing the rounds.

L&M fell a fractional 1 1/2p to 596p, Norwich Union gained 9p to 468p and Prudential gained 22p to 821p.

Wallpaper group Vymura fell sharply after a profits warning announced alongside flat interim results. Shares plummeted 25p to 110p.

Department store chain House of Fraser fell 7 per cent amid fears of overstocking for its spring-summer season. Shares dumped 8 1/2p to 106 1/2p.

The market continued to debate whether the recent correction marked a fundamental turning point or a temporary setback.

Howard Flight, deputy chairman of Guinness Flight Hambro, the fund management group, said: "It is time for British investors to adjust to the secular decline in inflation that has been occurring both in the UK and globally; the risks and rewards now argue for a 50/50 bond-equity investment posture.

"In a low inflation environment, the risk-reward ratios are different from the norms which UK investors have come to assume in the post-war era," said Mr Flight. "Where inflation is not driving equity outperformance, equities effectively re-acquire a riskier asset profile, as was the case during the period of low inflation between the two world wars."

BT Alex Brown has also been thinking about the relationship between bonds and equities. It argues against the notion that the price-earnings ratio should be the inverse of the bond yield; making the ratio of the earnings yield and the bond yield around 1. "If growth in Europe slows. . . then the (ratio) could easily fall towards 0.8 rather than 1," says BT Alex Brown. That reinforces its view that Europe could suffer a further 10-15 per cent correction.