Gilt stocks hit by political concerns

POLITICAL worries were not, according to the consensus, supposed to hit the British stock market until the second half of the year. But they made an early appearance yesterday, sending the FTSE 100 index lower in the first trading session of 1996.

However, a strong performance by Wall Street, where the Dow Jones was 40 points ahead at one stage during London trading reduced Footsie's losses. By the close, the leading index was 1.4 lower at 3,687.9.

The day started well, with Footsie racing to a new intra day all time high of 3,696.5, up 7.2, in the first minute of trading. But initial enthusiasm quickly evaporated, as gilts were hit by political concerns.

The weekend defection to the Liberal Democrats of Conservative MP Miss Emma Nicholson prompted renewed doubts about the stability of the Conservative government, especially as it was followed by press speculation about further potential defectors.

Most commentators had previously expected the Conservative government to last until 1997, with politics accordingly not becoming a significant market influence until the second half of 1996.

The benchmark 10 year gilt fell by around a quarter of a point and short sterling futures, the market's vehicle for speculating on interest rate changes, became markedly less optimistic about the prospect for rates in the later part of the year.

At its worst, Footsie was 22.4 points lower at 3,666.9. The market had already erased some of its losses by the time Wall Street opened, however, and for the rest of the afternoon it was a race to see if the leading index could finish in positive territory.

The FTSE Mid 250 index performed better than the blue chips, finishing above its 1995 highs at 4,036.9, up 15.6 on the day.

Volume remained sluggish throughout the day, with only 450.9 million shares traded by the 6pm count. The value of customer business last Friday, a half day session, was a healthy £1.3 billion.

As the new trading year begins, analysts are fairly cautious about the British stock market's prospects. The team at SGST, which was among the most bullish in 1995, is similarly upbeat about 1996, forecasting that the FTSE 100 index will end the year within a 4,000 4,250 range.

Mr Richard Jeffrey of Charterhouse, another of last year's more prominent bulls, is opting for Footsie to reach 4,000 by the end of the year. Mr Mark Tinker of James Capel has the same target.

But many other analysts are much less sanguine. Mr Tim Brown of UBS plumps for 3,800, a rise of just 3 per cent from the end 1995 level. Mr George Hodgson of S.G. Warburg Securities is expecting 3,750, with the market being battered by earnings downgrades during the spring reporting season.

Mr Steve Wright of Barclays de Zoete Wedd is also looking for 3.750 with the possibility that the second liners in the Mid 250 index might outperform the blue chips. Natwest Securities is forecasting 3,700, leaving Footsie virtually unchanged on the year.