Big mergers fail to lift interest rate gloom

Interest rate worries again dogged the London stock market yesterday and not even a couple of big takeover deals could lighten…

Interest rate worries again dogged the London stock market yesterday and not even a couple of big takeover deals could lighten the mood of investors. The Norwich Union/CGU deal had been forecast in the weekend press, but investors were not impressed by a nil-premium merger, sending Norwich Union shares down 9 per cent and CGU down 3 per cent. There was a rather more positive response to the link-up between Ocean and NFC, but the two transport stocks were not really large enough to give a lift to the overall market.

The FTSE 100 index closed 83.4 points lower at 6,081.6, having been 135.1 points off at 6,029.9 just before noon. The main reason for the sell-off appeared to be concern that US interest rates were set to rise sharply after the Humphrey-Hawkins testimony last Thursday of Mr Alan Greenspan, chairman of the Federal Reserve. The Dow Jones Industrial Average had stood up quite well to Mr Greenspan on Thursday but succumbed on Friday, dropping 295 points, a fall that was accompanied by a 3 per cent decline in the tech-heavy Nasdaq index. And with Wall Street closed for President's Day yesterday, there was no chance of a US rally to revive sentiment in London.

For once, the Techmark index, which for a while has appeared to defy the laws of gravity, took its share of the pain. The index of leading British technology-rated stocks fell 90.74 to 4,874.15.

But the medium and smaller-sized stocks generally held up well. The FTSE 250 index fell 1.8 to 6,296.6 and the SmallCap 10.7 to 3,243.6.

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But just as important as the overall market movements was the latest round in the battle between the old and new economy stocks. The old hands seemed to have the best of the battle yesterday, with National Power, Scottish Power, BG and PowerGen all benefiting from their perceived defensive characteristics. BT, which has in recent times been perceived as a new economy stock, bounced back from recent weakness on takeover hopes.

"It is hard to see the FTSE making any meaningful progress until either the domestic liquidity backdrop improves or until these US tensions ease," said the strategy team at Credit Suisse First Boston in its daily note. "At the stock level we see good reason to take a positive tactical stance on defensive stocks for similar reasons. These stocks have been clear laggards in the UK market since global policy began to ease in late 1998."

In the opposite camp, however, Dresdner Kleinwort Benson stated that the level of Footsie was a bit of a distraction. What was going on was a shift in sectors and stocks to those companies than could be winners because of new technology. In an era of low inflation, the stretch in valuation between the winners and losers seemed to be utterly appropriate, the bank said.

Volume was 1.92 billion shares by the 6 p.m. count.