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FTSE's 196-point plunge fuels fear bull run is over

Diane Coyle,Lea Paterson
Tuesday 20 April 1999 23:02 BST
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SHARES IN London went into sharp reverse yesterday, taking their lead from Monday's nosedive in US technology stocks.

The FTSE 100 index ended down nearly 196 points, or 3 per cent, at 195.5 - its fourth-biggest drop ever in points terms and the second biggest since the October 1987 crash.

Earlier in the day the FTSE 100 had been down by as much as 235 points, but the index stabilised when the Dow Jones index recouped some of its early losses in New York. At midday the Dow was nearly 60 points lower at 10,380.97, following Monday's closing loss of 53 points.

The volatility in London and New York in recent days reflects fears that the great bull market could be nearing its end. The International Monetary Fund contributed to these fears yesterday, with its chief economist, Michael Mussa, warning that US share prices could see a 20 per cent correction.

Mr Mussa said: "The market looks to be very handsomely priced at present and bringing prices down to a more normal relationship to earnings could easily suggest a 20 per cent correction or perhaps larger." But he added, cautiously: "I emphasise we have been talking about this for the last two-and-a-half years or so and it has not happened yet, so it is by no means a sure bet."

Uncertainty centred on the much-hyped high-technology stocks. The US Nasdaq index dived 5.6 per cent on Monday but staged a recovery yesterday morning. This was led by Microsoft, expected to announce good first-quarter earnings after the market closed.

The US rebound came too late for London, where Dixons was one of yesterday's biggest casualties. Its shares ended down 108p at 1,230p, an 8 per cent drop. Other technology and telecoms shares also fell, and there was profit taking in the banking sector.

Ken Wattret at Paribas said: "What seems to be happening is a revision of earnings potential for some of the sectors that have been performing exceptionally well of late. In the case of the UK, some of these sectors - such as pharmaceuticals and telecoms - have a heavy weighting in the FTSE 100 index. This all leaves the UK market looking a bit vulnerable."

Bill O'Neill, global strategist at HSBC Securities, said: "The Internet and information technology debacle has hit European markets in terms of the limited sector exposure we have here. The other sector that has been having a large impact is pharmaceutical stocks."

The stock market gyrations overshadowed new figures yesterday showing an increase in inflation due to increases in duties announced in last month's Budget.

The headline rate of inflation was unchanged at 2.1 per cent in March. But the Government's target measure - the RPI less mortgage interest payments - rose from 2.4 per cent in February to 2.7 per cent.

Higher fuel and tobacco duties and the pounds 5 increase in vehicle excise duty accounted for the rise. Much of this effect will be reversed next month as the impact of higher fuel duties in March simply reflected the fact that the Budget was earlier this year than last year.

Separate figures showed that the Government's finances were in even better shape than the Treasury forecast last month, recording a surplus for the first time since 1990/91. The Public Sector Net Cash Requirement was in surplus by pounds 7.4bn in 1998/99, and net borrowing was in surplus by pounds 5.2bn compared with a forecast figure of pounds 2.8bn.

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