THE equity market's three day rally petered out yesterday as fears of mounting inflationary pressures, with inevitable implications for British interest rates, returned to haunt investors.
The trigger for a slide in gilts and equities came from strong economic news, including the October employment report and details of average earnings and unit wage costs.
In the afternoon, there was no fresh support from Wall Street, which encountered a bout of profit taking. The Dow Jones Industrial Average has surged 245 points, or 4 per cent, since the start of November. The Dow was down over 20 points not long after the opening yesterday.
US Treasury bonds were on the defensive too, despite lower than forecast October producer prices. The US Federal Reserve's Open Market Committee met yesterday to discuss monetary policy. Strategists are not expecting any shift in US rates.
After a lethargic session, the FT-SE 100 index closed 7.4 points down at 3,926.9. The FTSE Mid-250, however, did much better, ending the day 5.4 firmer at 4,410.2, helped by good performances from many retailers, which progressed after strong rumours of a substantial bid this morning.
A lot of the speculative interest focused on House of Fraser. Body Shop and Sears were other stocks to make good progress.
The Small Cap index also managed a modest improvement, settling 2.0 better at 2,161.6.
London made a reasonable start, pushing up almost five points at the opening, with market makers happy to lift their quotations to accommodate yet another record on Wall Street.
But the picture changed with the release of the employment and earnings reports which saw unemployment falling to its lowest level for five years. Such evidence of a strong economy was accompanied by news that unit labour costs in the September quarter had risen by an annualised 5.2 per cent well above analysts' estimates.
The only good news, as far as the market was concerned, was the September average earnings figure which, at 4 per cent, was in line with expectations.
After that, Footsie was always on the back foot, closing around four points off the day's low.
Dealers said that turnover for much of the day was slow, despite evidence of a small to medium sized programme which appeared to feature a switch out of investment trusts into bands and insurance stocks.
But the big upturn in volume occurred minutes before the close with dealers noting a series of exceptionally big trades in Lonrho, Hanson, British Gas and Cookson, which they suspected were "bed and breakfast" or tax related deals. Others, however, suggested the activity was linked to arbitrage.
British Gas was heavily supported, partly thanks to the revival of old stories suggesting Shell was running the slide rule over the company. A bullish presentation in New York by Goldman Sachs made Lasmo the best Footsie performer.
