Fears of rate rise halt two-day rally

 

A FRESH bout of nervousness about the potential for increases in interest rates both in Britain and in the US brought a halt to the two-day rally in British stocks.

And there were further pressures being exerted on London stocks from continuing political uncertainty although that did not have too great an impact on gilts, which ended the session fractionally easier on the day.

The FT-SE 100 index fell back below 4,100 to finish the day 27.7 points lower at 4,092.5. But there was evidence that the weakness had been mostly induced by the Footsie future, which spent much of the session trading at a discount to fair value.

The FT-SE Mid-250 and SmallCap indices, on the other hand, managed to record further gains, the former moving up 4.1 to close at 4,521.5 and the latter 10.2 to 2,209.2. Both were said to have responded to a shift out of many of the leaders which are being hit by the strength of sterling.

Dealers said the big investing institutions had been reluctant to chase British stocks partly because of the continuing concerns about the US Treasury bond market.

The US long bond fell again yesterday after being down almost a half-point overnight. Two crucial items of US economic news - producer prices and non-farm payrolls - are released later this week.

The head of marketmaking at one European securities house said London was in for a choppy time. "We should be all right for this month as long as the US interest rate news is OK, but from then on it'll get increasingly awkward. We'll have to cope with a strong pound, political worries which look like getting worse, not better and the risk of a Wall Street correction."

Strategists expressed concerns about domestic interest rates, as did Mr Howard Davies, deputy governor of the Bank of England who told a conference that UK rates must rise in the near future if the government's 2.5 per cent inflation target is to be met.

Mr Richard Jeffrey, group economist at Charterhouse, the merchant bank, said: "The Bank of England is pressing for a rate rise and there are only two windows for such a move between now and the election. The first and best is next week, after the governor meets the chancellor. The second opportunity will be too close to" the election."

The continuing bitter weather, across the US and much of Europe saw oil stocks move sharply higher, with the notable exception of, Shell, which suffered from switching.

At the 6 p.m. count, turnover was 756.1 million shares. Customer business on Monday was £788.5 million sterling.