FTSE tumbles in wake of Wall Street volatility

Equities tumbled yesterday as the worst two-day performance on Wall Street since 1987, the prospect of rising interest rates on both sides of the Atlantic and the general election raised fears that the past two years' bull run in shares had finally run out of steam.

The FTSE 100 index of leading shares, which fell 112 points in early trading, closed 64.8 points lower at 4248.1. This was its second-largest fall this year after another volatile session on Wall Street gave investors little hope that the 300-point fall in the two trading sessions around the Easter break had run its course. Choppy trading in New York yesterday saw the Dow bounce around between plus 38 and minus 61 points, before closing at 6611.1, up 27.6 points.

Yesterday's fall in London, which follows a rise of almost 40 per cent in the UK market since the beginning of 1995, came as no surprise to dealers who had been forced to watch events in America from the sidelines during the Easter weekend. But having wiped out a quarter of Footsie's 4.7 per cent rise so far this year in one session, the fall left traders cautious about immediate prospects.

"There are quite a few things we need to get out of the way before we can have a crack at breaking new highs," said HSBC James Capel's strategist, Robert Buckland. "We need to get the election out of the way in the UK, and we'll have to see more numbers from the US to see if there will need to be more medicine in the form of higher interest rates."

Others felt the attack on UK shares, which wiped pounds 19bn off the value of the market at one stage, was inevitable but none the less harsh. "The UK market is taking a beating on the back of Wall Street, and it's a beating we don't necessarily deserve," said Simon Smith at Birmingham broker Albert E Sharp.

Wall Street aside, the biggest fear was that last week's quarter-point increase in US base rates was only the first of many such rises. "The reality is that this is the first of a series of rate rises in the US and the markets are readjusting to reflect that," said Martin Lupton, head of global equity trading at Dresdner Kleinwort Benson. At home, rates are expected to rise whichever party wins the election at the beginning of May.

In America, a degree of calm was restored to Wall Street yesterday as stocks steadied after two straight sessions of precipitate losses on Monday and last Thursday.

In spite of a fresh crop of strong economic news, the Dow Jones Industrial Average entered positive territory in morning trading after dipping 30 points straight after the opening bell. Wall Street none the less remains on edge as investors wait to see if New York stocks have only suffered a one-off correction that is now over or whether a longer-term bear trend is under way.

A significant factor is likely to be the role of the US mutual funds, which this week reported an unexpectedly poor performance, in value- gain terms, for the first quarter. Their average gain was a mere 2 per cent, the weakest in two years.

Confirming the continuing strength of the US economy, the Conference Board reported a 0.5 per cent jump in its index of leading economic indicators to 103.5 - the biggest such increase in a year.

The National Association of Purchasing Management, meanwhile, reported an increase in manufacturing output in March that was the highest for two years.

In London, almost one tenth of the FTSE 100's fall was attributable to just one share, BT. The 17.5p fall to 428p wiped more than 6.5 points from the index.

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