INCREASING fears that the long awaited correction on Wall Street was under way saw the Dow Jones Industrial Average plunge 65 points and caused a sharp sell-off in British equities.
Pressured by the steep slide on Wall Street, the FTSE 100 index closed 29.7 down at 3,714.6. Over the past three trading sessions, the index has lost 65.2 or 1.7 per cent.
The downside pressures were not as severe in the British market's second liners, where the FTSE Mid-250 index ended 12.1 lower at 4,177.9.
Wall Street recovered well after its initial slide, however, rallying to 11 points down within an hour of the opening before embarking on another retreat which saw the Dow 35 points off 90 minutes after London closed.
The impact on global markets once again emanated from bonds. The US long bond, which fell steeply on Friday night, lost further ground in Tokyo early yesterday, weakened again in Europe and dropped over a point as US markets began trading.
The bond weakness spilled over into bunds and gilts which, in turn, brought pressure to bear on equities.
London, with its own problems on the political and economic fronts, could not resist such pressures, and the FTSE 100, after starting 9.2 higher, in reflection of the ever-present bid speculation and good corporate results began to wilt in the face of some determined selling, mostly from local institutions.
At its worst, with the US long bond suffering badly and Wall Street looking to be on a precipice, the Footsie seemed set to drop below the 3,700 level but stabilised at 3,702.7 and, thereafter, began to claw its way back.
Dealers were at odds over the market's temperature. The head trader at one London securities house said sentiment was "terrible", noting that the optimistic tone of only last week had been reversed.
Another took an opposite view, however, and said the markets would take heart from the late pick-up in bonds and gilts.
Mr John Reynolds, global investment strategist at NatWest Markets, adopted a positive view of recent trends. "There is a feeling that the correction in bonds has been largely technical. My view is that, with inflation and growth subdued, calm will return and support equities," he said. He warned, however, of risks for Wall Street if bond yields reach 7 per cent.
Mr Paul Walton, UK market strategist at Goldman Sachs, the US investment bank, was firmly in the bearish camp. It was difficult to talk a bearish story during January, but clients are much more receptive now. We are not talking a crash in London but we do see the market stagnating over the next 12 to 18 months and getting down to 3,400 on the FTSE 100 during that period." He warned of shrinking market turnover and of difficult times for broking houses.
Among the individual stocks, hints that a series of sizeable forecast cuts are imminent saw RTZ fall sharply.
Turnover at 6 p.m. reached 764.5 mill ion shares. Customer business on Monday was worth £1.36 billion sterling.
