SUBSTANTIAL weakness in gilts and German bunds for much of the session was behind a gradual erosion of the British stock market's strong initial gains yesterday. London's weakness mirrored similar performances across Europe, notably in France and Germany.
European fixed income markets were unsettled by the weakness of US Treasury bonds overnight, with the yield on the 30 year bond moving back above the 7 per cent mark.
Bonds were additionally hit during the morning by reports of a split between members of Germany Bundesbank council over the revaluation of its gold and monetary reserves and by the prospect of a change of government in France after this Sunday's second round of the general election. However, both gilts and bunds recovered strongly during the late afternoon ahead of a statement from the Bundesbank.
Without the prop of a firm gilts market, equities were unable to build on a promising start to the session which saw the FTSE 100 index accelerate to within 18.5 of its previous intra day record, 4,723.7, attained on May 16th.
At the end of an increasingly nervous session, Footsie had dropped 4.1 to 4,677.5. Frayed nerves in London were not helped by a weak start on Wall Street yesterday.
The two junior FTSE indices, the 250 and SmallCap, never looked like emulating the good early gains in the leaders; the 250, up 6.5 at its best only minutes after the start of trading, finished the day exactly level at 4,508.0, while the SmallCap settled 0.4 easier at 2,299.8.
Other factors also led to the turn round in stocks. News that LVMH, the French luxury goods group which has a 14.2 per cent stake in Guinness, wants to exercise its rights to buy out Guinness's interests in the two companies' joint ventures hit the share prices of Guinness and its merger partner GrandMet. Those stocks were among Footsie's worst performers, sliding almost 3 per cent apiece, despite Guinness's rejection of LVMH's statement.
The closing tone in the equity market was in sharp contrast to the picture at the outset. Initially, share prices raced ahead in the wake of Wall Street's move to a closing record and in response to the continuing euphoria surrounding next Monday's stock market debut of the Halifax building society.
With the unofficial grey market price of Halifax shares topping the 740p mark yesterday morning, the bank sector came in for another burst of buying interest from institutions worried about a potential shortfall in their weightings in the sector. However, much of the froth was blown away in the subsequent market downturn.
The recent steady flow of sterling related profit warnings continued. Royal Doulton, the fine china manufacturer, and Hepworth, the building materials group, were the latest casualties.
Turnover was depressed as many fund managers took extended bank holiday breaks. At 6 p.m., volume was 655 million shares, below usual activity levels.
