Interest rise shocks market

After coping manfully with the recent Far East turmoil and the shift to order-driven trading, London's equity market was hit by a surprise increase in British interest rates yesterday.

It coped relatively well with the 25 basis point increase, announced at midday after the monetary policy committee (MPC) completed its two-day deliberations.

Up six points ahead of the rate-rise announcement, the FTSE-100 index reversed direction on the news, with the result that the index was down 35 points within a few minutes.

The index stabilised as the initial after-shock blew itself out, but the impact continued to reverberate, with sentiment not at all helped by a weak opening by Wall Street.

At its worst, Footsie was 67 points off, although it rallied well from its lows, eventually closing the session 44.5 down at 4,863.8.

Weakened by the performance of the leaders, the second-line stocks and smallcaps were also put under pressure.

The FTSE Mid-250 index finished the day with a 6.4 loss at 4,680.4, the low point of the session. It was being weakened, dealers said, by the impact of sterling's strength after the rate rise, which was seen as affecting the big exporters, heavily represented in the index. The FTSE SmallCap lost 2.4 to 2,322.9.

Market observers said dealers and institutions had been caught on the wrong foot by the move to higher rates, although the general view was that such a development had always been on the cards, if not so soon.

"It was a downbeat day in the market, but it never developed into anything too scary, unlike the panics from Hong Kong and the big slide on Wall Street," said one trader.

He said the market had taken the news "pretty well" but that it still felt "uncomfortable".

The overall feeling was that London could well fall further as the impact on rates was absorbed although today's non-farm payroll report from the US is now seen as a crucial event in determining trends in British equity markets.

"The MPC decision means a switch to lower economic growth," said one strategist, "but if the FOMC [US Federal Open Market Committee] sanctions a rise in US rates next week then it will surely undermine sentiment in global markets."

He said a rate rise in the US would probably take 200 points off the Dow Jones Industrial Average "to start with".

Turnover in equities remained depressed. At 6 p.m., it was a lowly 705 million shares with non-FTSE 100 stocks accounting for 60 per cent of the overall figure.

Mr Robin Griffiths, one of the market's leading chart analysts, said he saw the FTSE-100 "underwritten at 4,200, and we would buy it on weakness, especially below 4,500".

"Seasonally, the best time for a significant rally is late November through into the New Year," he added. "The panic line was almost there; line up the bargain hunters orders now. This is the best of times. There will be no crash in the UK."

It was a busy day for corporate news and a number of companies reporting results were the focus of attention including Royal & Sun Alliance Insurance which took a dive of 19 1/2p to 580p following a drop of more than £65 million sterling in pre-tax profits, down to £832 million.

Boots failed to bolster the retail sector and, even though profits were slightly higher than City expectations, shares slipped 21 1/2p to 868 1/2p. Britain's largest fund manager, Mercury Asset Management reported a marginal rise in interim pre-tax profit of £88.4 million, up from £81.8 million at the same time last year. But this disappointed dealers and shares plunged 20p to £13.30.

The City, still digesting the news of a possible takeover bid for tankmaker Vickers by engineering group Mayflower Corporation, again bought Vickers as shares rose 1p to 249p while Mayflower fell a further 5 1/2p to 184p.