Equities close above lowest levels despite early turbulent sentiment

Another storm from the far east, the primary source of the turbulence in stock markets over the past few weeks, caused severe damage to the recent rally in London equities.

News of the collapse of Yamaichi, Japan's fourth largest stockbroker, was greeted by blanket coverage of the event by the world's media and numerous predictions of substantial falls in global stock markets.

In the event, the FTSE 100 stocks bore the brunt of the decline, with the second liners and small cap shares nowhere near as weak as the leading index. Footsie finished a tense trading session 87.2 points, or 1.7 per cent, lower at 4,898.6. The FTSE 250 gave up 20.0 to 4,645.7 and the SmallCap 12.9 to 2,266.1.

The fear was that the Yamaichi news, coming hard on the heels of the failure of Sanyo Securities and Hokkaido Takushoku Bank, would see wholesale selling of global stocks and bonds by Japanese institutions. In particular, dealers were worried that the US bond market might crack.

UK stocks managed to finish well above their lowest levels, however, as Wall Street did not fall as far as some had predicted. The Dow Jones Industrial Average, which had been forecast to drop by between 75 and 100 points, was down by 50 points shortly after the opening. US Treasury bonds posted falls of around 10 ticks as that market opened.

There was another prop for London as last week's sudden burst of takeover activity, which included the £3.1 billion agreed offer for Mercury Asset Management, was followed by more bid news including a hostile move against Allied Colloids, the speciality chemicals group.

Other leading stocks to move into the sights of the takeover speculators included Safeway, the supermarket group, and Hanson, the former conglomerate which now comprises mainly building materials businesses.

London kicked off the day in depressed fashion, sliding over 50 points within 30 minutes of the start of trading and carrying on down to post a three-figure decline in mid-morning, ignoring the modest gain in the Hong Kong stock market. The Tokyo market was closed yesterday for a public holiday.

Activity in equities was subdued as the institutions held off ahead of today's Green Budget. Turnover at 6 p.m. was a disappointing 658.3 million shares, of which 58 per cent was in Footsie stocks.

In their latest note, the strategy team at NatWest Markets insisted that "although absolute market benchmarks such as the price earnings ratio or dividend yield look stretched, they are not once account is taken of the new low inflation/low interest rate environment." NatWest is sticking with its FTSE 100 targets of 4,800 for end 1997, 4,800 for end-1998 and 7,000 in 2,000.

BZW's strategy team pointed out that the latest Wood Mackenzie survey of pension funds showed that UK funds have cash weightings over 6 per cent, a level last seen when base rates were 15 per cent.