Disappointing home news has sharp impact on gilts, equity market prices

DISAPPOINTING domestic economic news, plus a poor showing by German bunds in the wake of the latest Ifo survey of business confidence and the M3 money supply figures, had a sharp impact on shares in London yesterday.

With gilts always on the back foot there was precious little support for equities. British institutions are seen as having completed their pre budget strategy moves and are reluctant to shift their portfolio stances.

London gave an early and rather grudging response to Wall Street's Tuesday night surge, which powered the Dow Jones Industrial Average towards the 6,400 mark. And there was no budging the bearish mood in London during the afternoon, even when the Dow moved past 6,400.

Some UK dealers said they expected London to respond eventually to the rise on Wall Street, which some of the raging bulls see penetrating 6,500 on the Dow in short order and 7,000 in the medium term.

The same dealers warn, however, that any evidence of overheating in the US economy will bring a rapid response from the Federal Reserve, which, they say, would move instantly to hoist US interest rates.

The latest UK economic news was responsible for the early turnaround in London stocks. A 0.4 per cent monthly rise in October retail sales was in line with forecasts and should have caused no problems for investors. But taken along with a higher than expected M4 money supply number, the figures caused extreme unease in the gifts market, which instantly fell away.

Just before the close the 10 year gilt was down around a quarter of a point, and the 20 year issue off some three eighths, amid worries that another rise in UK interest rates may take place before the election, expected at the start of May next year.

The FT-SE 100 index settled 15.3 lower at 3,962.8, not far from the day's low point. The FT-SE 250 held up well, however, closing only fractionally off, down 0.1 at 4,400.2. The FT-SE SmallCap eased 0.6 to 2,159.8.

British stocks also balked at the latest bid developments, which included news that Energy in the US had terminated talks with London Electricity.

And the bid speculation in British Gas continued to lose momentum. Specialists maintained that the Shell hid rumours had at least highlighted the outstanding value in Gas shares after their year long mauling. Railtrack was the best Footsie performer as investors focused on the stock's outstanding asset value; the shares have risen over 75 per cent since their May float.

British Energy, the year's other privatisation stock, was prominent in the FT-SE 250 ahead of this morning's maiden interims. Since its July float, shares in British Energy, the only privatisation issue to slide to a discount on its debut, have risen over 40 per cent, compared with a 6.4 per cent rise in Footsie.

Turnover at 6 p.m. was 712.4 million. Customer activity on Tuesday only just scrambled over the £1 billion sterling mark, reaching £1.02 billion.