A GRADUAL weakening of sentiment in gilts, plus a return of uncertainty surrounding Wall Street, unnerved a previously buoyant British stock market, which slipped into negative ground only minutes before the close.
Earlier, most stock market indices had moved to record highs in the wake of encouraging economic news and increasingly powerful takeover rumours in the financial sectors.
Adding to the market's nervousness were rumours that the Prime Minister had plumped for a mid to late March date for the election, which some observers saw as a response to growing pressure for an early increase in British interest rates.
A report yesterday said Treasury officials had joined the Bank of England in calling for a rate rise.
At the close, the FTSE 100 index was left 0.1 off at 4307.7, having touched an intra day peak of 4330.0 over lunchtime.
The FTSE SmallCap extended its good performance this year, rising 4.2 to a record closing high of 2326.4, only 0.12 below its all time intra day high reached earlier in the day.
The FTSE 250 managed to clamber back over 4600 to get to within 14 points of its all time high, but later fell back to end only 4.6 ahead at 4596.7.
The market's closing performance was in sharp contrast to events during the morning when share prices gave a ready response to the producer price data for January, which were seen as demonstrating the lack of inflationary pressures.
From trading just over 5 points lower, the FTSE 100 moved quickly into its stride and up to a record high as the producer price numbers were announced.
In addition, sterling provided a measure of encouragement to the equity market, appreciating against the dollar but losing ground against the deutschmark and easing against the Bank of England's trade weighted index.
Wall Street gave little comfort to London. The Dow Jones Industrial Average, which rose 84 points last Friday, fell around 10 points shortly after the opening and posted a near 20 point fall as London closed.
There was support for the British market from Lehman Brothers, where the strategy team said: "We continue to expect UK equities to outperform both gilts[ and other European markets." Lehman pointed out that the gap between the forward earnings yield on equities and the long gilt yield "remains relatively narrow; when this has occurred in the past equities have outperformed gilts by 19, per cent on a six month view.
Dealers said the afternoon sell off had substantially boosted turnover in equities. At 6 p.m. 818.2 million shares had changed hands, well above usual levels for a Monday. Customer business on Friday, excluding Crest transacted trades, was worth £801.1 million sterling.
Takeover talk continued to drive fund management stocks, notably Mercury Asset Management, although the real push behind MAM came from an upgrade by SBC Warburg.
