Market unbowed after sudden attack by Chancellor on tax credit scheme

LONDON'S equity market emerged slightly bruised, but ultimately unbowed, after a sudden attack on tax credits for share buy-backs and some special dividends by Mr Kenneth Clarke, the Chancellor of the Exchequer.

Although the FT-SE 100 dropped back through 4,000 in a knee-jerk reaction, it later staged a resolute and sustained recovery, eventually moving back into positive ground triumphantly ending the day at its third consecutive closing record.

The FT-SE finished the day a net 4.1 up at 4,035.6. The second line index, the FT-SE 250, fared less well, closing a net 5.7 off at 4,435.3, although well above its lowest level, 4,421.2, reached early in the session.

Senior traders said London's recovery was a clear demonstration of the market's underlying strength. "It feels pretty good underneath and there is definitely an expectation of more takeover activity around the corner," said the head of marketmaking at one big European securities house.

Other dealers concurred. "The market is basically all right," said another. There was bad news from the dealing room at Merrill Lynch, however, where it emerged that the stockbroker's market-making team of 64 was being cut to 50, with some of the axed traders being moved to other areas. Talk of substantial job cuts at Merrill, which took over the former Smith New Court stockbroking firm last year, has been rife for many weeks.

There was further excitement in dealing rooms with news of a "dawn raid" on Blenheim, the exhibitions group. Eurotunnel was another big feature, the shares returning from suspension and initially moving higher before attracting waves of selling pressure.

But it was the Chancellor's bolt from the blue on share buy-backs and special dividends that was the day's main talking point.

Mr Bob Semple, UK equity strategist at NatWest Securities, commenting on the changes, said: "The truth is less scary, the aim of the changes is not to stop payment of the tax credit on special dividends, but to stop the abuse of the system whereby, in certain circumstances, the benefits are targeted towards the gross funds."

As examples, he pointed to share buy-backs targeted towards gross funds rather than all investors and to the Inland Revenue not wanting to finance bids such as Granada/Forte and Lloyds/TSB

The NatWest strategist edged his year-end FT-SE 100 forecast up to 3,900 and lifted his FT-SE trading range to 3,700/4,100 to take account of the recent strength of UK gilts and US bonds. However, Mr Semple cautioned that gilts and equities "are moving into dangerous territory".