Markets breathe general sigh of relief

THERE were sighs of relief across European stock markets, London included, yesterday after the US Federal Reserve left interest rates unchanged.

London was given a further lift, albeit only temporary, by a smaller than expected increase in M4 money supply during April, which gave a boost to an already firm gilts market. Later in the session, however, gilts began to give way, eventually closing under considerable pressure, along with other global bond markets. The money supply figures were seen by some observers as reducing the immediate pressure for a further interest rate rise.

The stock market was also helped by some generally favourable corporate reports, which included excellent results from FTSE 100 stocks such as Land Securities and Carlton Communications.

The FTSE 100 index had fallen 86.4, or 1.8 per cent, over the previous two sessions when the US interestrate worries intensified. Yesterday it recouped 34.5 to 4,642.0, only 51.9 off its all time closing high and 81.7 away from its intraday peak of 4,723.7; both figures were reached on May 16th. The FTSE AllShare picked up 13.0 to 2,209.21.

Other FTSE indices failed to keep up with the leaders, however. The FTSE 250 could only manage an 11.3 improvement at 4,500.4 and was burdened by a horror story in the biotech sector, where Celltech shares more than halved in the wake of acutely disappointing news on one of its drugs. Other biotech stocks retreated in sympathy.

Even worse, the FTSE SmallCap index finished in negative territory, ending the day 2.9 down at 2,301.6, weakened by a string of profit warnings from companies such as Bluebird Toys and Sketchley, among others.

There were signs during the afternoon, however, that the market's confidence was being gradually, but significantly, eroded as bonds fell away and Wall Street relinquished its earlier gains.

The Fed's decision helped the Dow Jones Industrial Average rally on Tuesday to end with a 74 point gain, almost at a record high. In early trading yesterday, the Dow was showing a 20 point plus rise. That was wiped out as London closed and turned into a 28 point fall soon after.

Marketmakers said the mood in London had turned cautious near the close and that fund managers had begun to express concerns about the decline in bonds.

"There is a feeling around the market that today's move is a shortcovering rally, nothing more. Demand from the institutions was never more than light," said a senior trader at one of the big UK securities houses.

The financial sectors remained at the forefront, with property stocks among the best individual performers. The results from Land Securities, the UK's biggest property group, had prompted something of a re-rating of the sector, traders said. Turnover at 6 p.m. totalled 807.9 million shares, well up to recent best levels, with Footsie stocks accounting for well over half the total.