Weak US bonds stall UK recovery

ANOTHER big early sell off on Wall Street, where the Dow Jones Industrial Average plunged over 60 points shortly after the opening, plus the prospect of an intensification of the mortgage price war in Britain, sent London share prices sliding again yesterday.

The FTSE 100 index moved in a 68 point arc, with the index ending another extremely volatile session a net 35.0 lower at 3,639.5. There was some respite, however, for the second liners, which again demonstrated their resilience in the face of the big sell off in the leading stocks. The FTSE Mid-250 index closed 10.7 firmer at 4,222.7.

Wall Street's latest decline caused extreme nervousness in global markets, coming on the heels of a big recovery in the Dow the previous session. "It was a real shock and caused some serious rethinks among European fund managers, who had thought that Wall Street and Europe had ridden out the storm," said one trader.

Ninety minutes after London closed, the Dow looked set to fall over 100 points, before staging a small rally. The weakness in the Dow was attributed by London dealers to the latest slide in the US Treasury bond market where the 30 year bond was down 1 3/8 shortly after London closed.

"The bond market, as always, remains the key to Wall Street and Europe," said one market, strategist, who attributed the latest spate of selling to increasing uncertainty ahead of a raft of economic news expected tomorrow and on Friday.

This includes producer prices inflation news, industrial production details and manufacturing output, all of which are capable of causing a big upset to bonds and therefore to Wall Street.

Strategists expect more volatility across global market for the rest of the week, especially as the dollar fell below what was previously seen as a strong support level of 1.48 deutschmarks.

The drama during the afternoon was in stark contrast to the market mood at the opening. Then, the Footsie had opened in a confident mood, regaining the 3,700 level and up 33.1 in the wake of the 110 point rally in the Dow on Monday evening, which recouped two thirds of last Friday's 171 point loss. That rally owed much to a one point improvement in the bond market.

The initial jump in London proved short lived, however, with market makers reacting very quickly to the absence of any substantial client business, and cutting their quotations in an attempt to drum up retail business. Renewed selling of US bonds in the Far East and Europe provided a pointer to equity markets.