SHARE prices in London dropped sharply yesterday in line with falls in international bond prices and weakness in European stock markets.
By the close, the FTSE 100 Index had lost 34.7 points to 3,746.6, wiping out all of Friday's gains. The junior Mid 250 Index did not suffer as badly, falling only 15.8 points to 4,136.4.
Shares were led lower by gilts, with the benchmark 10 year issue falling more than a point, to yield 7.73 per cent. German government bonds also fell by over a point.
Analysts were divided about the cause of the weakness in international bonds. Some said it was due to a feeling that governments reflationary policies, designed to stimulate a slowing world economy, might eventually create inflationary pressures.
Mr Richard Jeffrey, Charter house group economist said What's happening in the gilt market is the reaction I expected after the last base rate cut.
But Mr Keith Skeoch, chief economist at James Capel, pointed to nervousness ahead of the US Treasury auctions today, tomorrow and Thursday, and to concern that the Bundesbank might not cut rates as quickly as some would like.
Whatever the cause, the recent weakness in gilts has pushed up the yield ratio the relationship between bond and equity yields from 2.04 at the start of the year to 2.16 at the end of last week. A higher ratio makes shares look relatively less attractive.
Add on the effect of a weaker dollar on European bourses shares in Paris and Frankfurt fell by 12 per cent and London had little hope of escape.
Domestic news did not help. British Airways' third quarter results were at the lower end of the range of expectations and the shares were marked down accordingly.
There was, at least, some continued bid speculation to lighten the gloom. Pearson, the media group which owns the Financial Times was one of the few Footsie gainers on the back of a weekend story that Vincom of the US was a potential bidder volume was light, however.
Traders marked shares lower at the opening in response to Friday's fall on Wall Street in both bond and share prices. Footsie began the day 18.3 points lower at 3,763.0.
The malaise which affected international bond and stock markets prevented Footsie from staging a rally and shares received a further knock in the afternoon when Wall Street opened weaker. At its worst, the leading index was 38.2 points down at 3,743.1.
Volume was reasonable for a Monday, with 734.7 million shares traded by the 6 p.m. count. Customer business on Friday was a healthy £1.96 billion.
