ALREADY seriously weakened by the prospect of some hard hitting proposals in the July 2nd budget, British equities were given an additional hammering yesterday by news that domestic retail sales during May increased by a much bigger than expected 1.1 per cent.
That news, dealers and analysts said, substantially increased the possibility that the newly constituted Monetary Policy Committee would increase domestic interest rates after their next meeting, scheduled for July 10th.
In the background there was a story doing the rounds that one of the big British financial institutions had suffered losses of up to £200 million sterling from its activities in derivatives. London also had to cope with bad news from the US, where share prices on Wall Street fell heavily in the wake of profit warnings from high tech stocks.
The Dow Jones Industrial Average, which has been hitting record highs over recent weeks, gave up over 50 points shortly after trading commenced in New York yesterday.
There was, however, some comfort for investors as a burst of buying towards the close of trading took the FTSE 100 index well off the session low. The market's second liners and the small cap stocks remained almost totally friendless, however.
At the finish of a day featured by relatively low volumes - again - affected by low attendances around trading desks due to Royal Ascot - Footsie ended 25.2 down at 4,657.0. At its worst, Footsie fell 54.9 and looked likely to threaten the 4,600 level. That fall extended Footsie's decline over the week to 126.1, or 2.7 per cent.
The FTSE 250, meanwhile, slipped 21.8 to 4,516.2, increasing the fall in that index to 69.9, or 1.5 per cent over three days. The smallcap fell 9.3 to 2,270.3.
Dealers said the market had coped well enough with the selling pressures provoked by the report that the new government intends to abolish the 20 per cent tax credit on dividends, but had been panicked by the retail sales report which instantly aroused fears of a rate rise next month.
"If there had been any doubts that rates were going up after the July 2nd budget, that retail sales report would have dispelled them," said a senior marketmaker at one of the big British securities' houses. "We could be in for a rough ride up to the budget and beyond," he added.
Mr Richard Jeffrey, group strategist at Charterhouse Tilney, said: "The threat of substantial interest rate increases is becoming much clearer. I continue to believe that British interest rates will be around 8 per cent by the end of the year.
NatWest Securities warned: "Our optimistic forecasts for UK equities were based on a view that New Labour would stick to a tough fiscal and monetary policy. We were less certain about the supply side policies of the new Government. Unfortunately these misgivings are growing as there are signs that much Old Labour dogma about the corporate sector persists.
Turnover in equities at 6 p.m. was 840.8 million shares.
