Losses follow Far East turbulence

London shares extended Tuesday's losses as worries about the potential for further turbulence in the Far East returned to haunt European markets. Those fears proved too much of a burden for an equity market already hit by the weak performance of Wall Street overnight and again in early trading yesterday.

The Dow Jones Industrial Average threatened a three-figure fall not long after London closed. Also weighing on equities was a modestly disappointing outcome to the gilts auction, which was covered only 1.77 times compared with expectations of 2-2.5 times. Gilts drifted back around 4 ticks, removing one of the recent props under the equity market.

Further unsettling news for shares came with confirmation from the monetary policy committee that the last rise in UK interest rates - the 25 basis point increase in November - was unanimous and that further increases might be necessary to contain inflationary pressures.

The FTSE 100 index closed the session 46.4 off at 5,130.7.

Downside pressures on the second and third line stocks were much smaller, however. The FTSE 250 index again outperformed the senior index, and gave up only 12.3 to 4,769.3, while the FTSE SmallCap ended a net 0.5 lower at 2,305.1.

Dealers were not too depressed by London's showing, pointing out that the factors behind the Footsie's move above 5,200 in recent sessions remained intact.

"The share buybacks and takeover stories are still around and the institutions remain stuffed with cash," said one trader.

The banks and insurance sectors, alive with bid speculation for so long, took a back seat yesterday with the Far East sensitive stocks, HSBC and Standard Chartered, coming under heavy fire.

But some banking specialists said UK stocks might well react positively to speculation that further pan-European mergers might be on the cards, specifically between two of the leading French banks, Paribas and SocGen, and Germany's Dresdner Kleinwort Benson and Allianz.

There was some actual takeover news to keep the speculators happy; Christies International, the auctioneers, said it had received another approach that could lead to a full bid.

Retail stocks, already buffeted by Tuesday's rather gloomy report from the British Retail Consortium, took another pounding after a disappointing trading update from Kingfisher.