The recent period of relative calm that saw global markets, including London regain some of their lost confidence was severely tested yesterday. A resumption of the slide in Far Eastern markets, specifically Hong Kong and Japan, plus increasing nervousness about the short-term course of domestic and US interest rates put British stocks under severe downside pressure from the outset.
There was worse to come later in the session when Wall Street came in sharply lower at the start of its trading day, similarly unsettled by the prospect of a rise in US interest rates after the regular deliberations by the US Federal Reserve's open market committee meeting in Washington yesterday.
Chartists, already in defensive mood, adopted an even more bearish stance. "The FTSE 100 index pattern is now looking very vulnerable and a setback to the 4,200 to 4,400 area short-term still looks possible; US equity indices also look very bearish," said Mr Richard Lake of Brewin Dolphin Bell Lawrie, the stockbroker.
On the domestic front, London also had to cope with a series of economic news items, including the October unemployment report and average earnings details for September, as well as the Bank of England's quarterly inflation report.
Dealers said the fall in unemployment, down 9,500 compared with forecasts of a 30,000 drop, plus the 4.25 per cent increase in underlying average earnings, against forecasts of a 4.5 per cent rise, should have been supportive of the market.
The bank's inflation report, on the other hand, did little to calm the nerves of those who expect the Monetary Policy Committee to recommend another increase in British rates in the not too distant future. It warned that the risks on inflation "are on the upside", additionally noting the pace of domestic demand and strong growth in British gross domestic product.
Sterling's response to the bank report was to move higher, the Bank of England's sterling exchange rate index pushing up 0.4 to 104.2.
The FTSE 100 managed to finish above the 4,700 level, ending a day of extreme weakness a net 73.3, or 1.5 per cent, lower at 4,720.4, having fallen to a session low of 4,680.4 - down 113.3.
The smaller indices also had to cope with waves of selling pressure which left the FTSE Mid-250 54.5, or 1.2 per cent, off at 4,585.7 and the FTSE SmallCap 17.9, or just short of 1 per cent, down at 2,292.8.
Despite the wholesale retreat by the leaders, there was a handful of gainers in the Footsie. The water stocks, always well to the fore in weak markets because of their defensive qualities, provided two of the best individual performers in the 100 index in Severn Trent and Thames Water.
