THE post election euphoria that propelled London shares to a series of new peaks evaporated yesterday. The big investing institutions preferred to sit on the sidelines until news emerges from today's crucial meeting of the US Federal Reserve's Open Market Committee.
The fear is that the Fed may signal another increase in US interest rates; it last raised rates by 25 basis points in March, a move which triggered a near 10 per cent decline in the Dow Jones Industrial Average.
Dealers said that expectations of a rate rise in the US stood at 50/50, which, coupled with the worries about a further rise in UK interest rates and the forthcoming budget, could well see London under pressure in the short to medium term.
The FTSE 100 index ended 48.7 lower at 4,645.2, only 4.5 clear of the day's low, 4,640.7, reached shortly after Wall Street opened.
Second line issues, which have failed to match the leaders' startling gains since the election, managed to escape the selling pressure imposed on the frontline stocks but still posted losses.
The FTSE 250 finished the day 15.3 off at 4,510.4. The FTSE SmallCap lost 5.3 at 2,311.5. Adding to London's unease over US rates was a nagging feeling that the new Labour government's "honeymoon period", which has seen Footsie rise 200.2 points, or 5 per cent, since polling day, may have run its course.
A senior marketmaker at a big European securities house said: "Valuations of UK stocks are beginning to look stretched; Wall Street has stuttered and we, might be looking at a correction."
There were other factors affecting London yesterday, including the closure of many European stock markets, which saw overseas interest in UK stocks down to a minimum.
And Wall Street gave little cause for enthusiasm in London, with the Dow following last Friday's 138 point retreat with an uncertain opening yesterday. Down 20 points shortly after the start of trading, the Dow managed to claw back its earlier losses and was showing a minor gain an hour after London closed.
Turnover at 6.00 p.m. was a respectable 633.6 million shares with some market traders hinting at possible programme trading activity, although others said any programmes would have been on a small scale.
There was no support for equities from gilts, where losses ranged from around 11 to 14 licks, despite the encouraging public sector debt repayment of £36 million sterling, which confounded forecasts of a borrowing requirement of £1 billion plus.
Despite the steep fall in Footsie, some market participants expect more takeovers and mergers, especially in the financial sector.
There were further hints that the longmooted break up of BAT's financial services and tobacco businesses might be about to materialise.
The forthcoming flotations of Norwich Union, the general insurer, and the Halifax building society are also seen as bullish for the market in the short term.
