A SHARP decline in global bonds, encompassing US Treasuries, German bunds and British gilts, cut the ground from underneath London's equity market just as the FTSE 100 index had 3.900 in its sights.
In early trading, the Footsie had made rapid progress, establishing a new intra day record in response to Wall Street's overnight gain, which took the Dow Jones Industrial Average clear of the 5,700 level.
At its best, the Footsie reached a record intra day level of 3,894.4, fuelled by substantial gains in a number of the pharmaceutical stocks, British Gas and the big mortgage lending banks.
However, the publication of a stronger than expected survey of business confidence in Germany triggered a sell off in bunds and weakened other government bond markets.
The survey, the monthly Ifo business index, was interpreted as lessening the chances of the Bundesbank council endorsing a reduction in Germany's repo rate. A surprise 0.6 per cent fall in British retail sales during July also took the market by surprise, causing retail stocks to lose some ground.
The news from Germany brought pressure to bear on US bonds. In turn this caused US stocks to lose ground at the outset of trading in New York, despite Tuesday's decision by the Federal Reserve to leave US interest rates unchanged.
Consequently the FTSE 100 index went into an orderly retreat and closed a net 11.1 lower at 3.872.1. London's second line stocks managed to resist the pressure emanating from bonds and Wall Street, with the FTSE Mid 250 ending the day 2.1 firmer at 4,387.4.
Dealers said the market's retreat had not come as a big surprise. "We've had a good run and were overdue a bout of consolidation," was the view of one senior trader. He said the emergence of the latest takeover rumours was a symptom of an overbought market.
Talk of a Footsie bid had circulated in the market on Tuesday and yesterday saw a flurry of excitement in the drugs sector, where there were various rumours involving SmithKline Beecham, Glaxo, Zeneca and Switzerland's Roche.
There were various permutations involving those stocks, including the strongest rumour which suggested a merger between SmithKline and Roche, which would provoke Glaxo into merging with Zeneca. Specialists said merely that such stories popped up regularly, especially during periods when market activity was slack.
The Footsie's best performance came from British Gas, whose shares raced higher in the wake of an Ofgas review regarded as much less damaging to the company than had been feared.
Turnover in equities continued to pick up yesterday, reaching 656.9 million shares at the 6 p.m. count.
