British Gas dominates centre stage

MACRO ECONOMIC issues took a back seat yesterday as the market absorbed the news of the break up of British Gas into two separate companies and a profits warning from Allied Domecq.

The FTSE 100 index moved in a narrow range of just 12 points during the session, finally managing a modest 0.9 point rise to 3,747.5. The junior Mid 25-0 index did slightly better, adding 3.7 at 4,140.1.

Reaction to the British Gas announcement kept traders busy, with the stock recording the day's heaviest volume. The share price received an initial lift, but analysts were sceptical about the demerger's merits and the result was that the shares closed lower on the day.

The latest in a series of UK corporate profits warnings came from Allied Domecq, the drinks group. The warning was not directly linked to a slowing UK economy, referring as it did to difficult European spirits markets and a decline in sterling profits from Mexico.

Nevertheless, Allied's statement is likely to make investors even more cautious as the March results season approaches. The one Footsie company which did report figures yesterday - BSkyB, the satellite TV company - produced strong profits growth, but the shares were hit by the Office of Fair Trading's referral of the group's football deal to the Restrictive Practices Court.

More bad news came from the corporate sector when Coal Investments, a company which enjoyed a phenomenal share price rise in 1994, called in the administrators.

On the economic front, industrial production was slightly stronger than expected in December but this was mainly due to a rebound in the energy sector because of the cold weather. Manufacturing output fell 0.7 per cent on the month and the fourth quarter also showed a decline from the previous three months.

Mr Adam Cole, UK economist at James Capel, said: "Although part of this weakness - which is largely an export phenomenon - is being offset by strength in the consumer sector, there is little doubt that the economy overall will continue to grow at below its long term sustainable rate in the near term. Against this background, interest rates have further to fall."

The market received a couple of fillips from Wall Street an early lift to the best level of the.day, up 7 at 3,753.6, on the back of the overnight rebound in the Dow Jones Industrial Average; and an afternoon pick up as the Dow climbed 20 points by the close of London trading. The latter helped the Footsie lift off its worst level of the day, down 5 at 3,741.6.

A recovery in gilts after Monday's decline also helped equities. The benchmark 10 year issue, which fell by more than a point on Monday, regained a third of a point. Monday's gilts weakness pushed the yield ratio, the relationship between gilts and, equity yields, up to 2.2, its highest level since October, making it difficult for shares to make progress without a rebound in bonds.

The intense interest in British Gas helped to boost trading volume to 871.7 million shares. Customer business on Monday totalled £1.65 billion sterling.