Equities weaken ahead of Fed rate decision

The British stock market lost ground yesterday as investors remained nervous ahead of today's crucial interest rate decision from the US Federal Reserve.

The FTSE 100 index spent much of the day in negative territory although its losses were never significant. Most analysts expect the Fed to raise rates by half a percentage point to head off inflationary pressures.

That view was reinforced by US industrial production figures which showed a 0.9 per cent rise in April and a 0.7 per cent increase in March, revised up from the previous estimate of 0.3 per cent.

Wall Street gave the British market little help yesterday with the Dow Jones Industrial Average up modestly but the Nasdaq Composite down 2 per cent by the London close.

The FTSE 100 inched up seven points to 6,290.5 in the first two minutes of trading but then settled into a rut for the rest of the day. It closed off 35.8 at 6,247.7, having been off 65.3 at 6,218.2 at worst.

The FTSE 250 also lost ground, dropping 11.8 to 6,259.5. The SmallCap edged up 6.1 to 3,203.4, having traded in an incredibly narrow range of under six points all day.

With Nasdaq under pressure, the Techmark 100 index of leading technology stocks had another bad day, dropping 52.48 to 3,411.06.

Manufacturing stocks were given a bit of a lift by the weakness of sterling, which fell against the euro. GKN and Invensys were among Footsie's best performers.

Telecom and technology stocks were the main casualties, with TeleWest, Colt, Kingston and Thus all suffering. Catering group

Com- pass was Footsie's worst performer on investor disappointment about the terms of the potential deal with Granada.

Mr Gareth Williams, UK strategist at ABN Amro, said: "The UK market has been struggling to find its direction. In recent weeks, expectations about US rates have deteriorated and until we get through the summer and get some sense of where they will peak, the UK will struggle to make progress." However, he hopes the British market can rally towards the end of the year.

On sector strategy, Mr Williams said: "I don't think this is the time to be jumping out of digital economy stocks. You should be looking for the better plays. At the same time, investors should look for the old economy stocks that are cheap relative to their peer group in areas such as food producers and construction."

Mr David McBain, UK strategist at Deutsche Bank, said the British market "continues to experience earnings downgrades in a way no other market is experiencing. The liquidity picture is also not supportive." This made it hard to be enthusiastic about the London market even though, as Mr McBain said, "the valuation looks OK relative to its peers".

Turnover was a modest 1.38 billion shares by the 6 p.m. count.