Rate worries bring Footsie down to earth

Market Report

INTEREST RATE worries, one of the market's favourite bugbears, returned to haunt Footsie yesterday, dragging the index down from last week's heady heights.

Blue chips were hit hard by a classic interest rate double whammy, as dealers started the week fretting about monetary policy on both sides of the Atlantic.

Red numbers invaded the dealings rooms' screens amid a growing belief that the Bank of England will put an end to the rate cut bonanza of the last few months tomorrow.

That rate-on-hold feeling was given a further boost by a relatively benign manufacturing sector survey. Across the pond, the odds of a Federal Reserve tightening are shortening by the minute and the latest batch of economic data has given the bears plenty of ammunition.

Footsie was caught in the crossfire, tumbling 114.2 points to 6,060.9. The blue-chip index has now fallen back to the levels reached before last week's record-breaking rally.

Banks and insurers, one of the drivers of the recent outperformance, led the retreat. Sellers were encouraged to book in profits by the end of the results season and the ex-dividend dates of a number of financial stocks.

Abbey National was an example of the ex-divi carnage, dropping 66p to 1187p. Halifax followed suit, ending 32p lower at 735p. NatWest was also a prominent constituent of the ex-divi brigade, tumbling 42p to 1250p. Royal Bank of Scotland was hit by profit taking and showed a 68p deficit to 1,150 - the biggest Footsie faller of the day.

The Woolwich unravelled, losing 13.5p to 381.5p as Credit Lyonnais advised a switch to Northern Rock, down 3.5p to 488p. Among the insurers, Sun Life & Provincial rose 2 per cent in early trade after good results before succumbing to the financials' bloodbath. The life assurer, currently buying GRE, finished 3p off at 486.5p.

GEC provided a glimpse of blue in Footsie's red sea. The $2.1bn buy of the US telecom operator Reltec was given the thumbs-up by the market and the stock rang up a 18p rise to 516p. More is still to come as GEC looks to spend the pounds 7.7bn received from British Aerospace for its Marconi subsidiary.

Smiths Industries, the aerospace group, was another high-flyer, reaching a dizzy 26.5p advance to 973p as it draws up plans for a pounds 1bn acquisition spree.

The Footsie hopeful South African Breweries kicked off its London career with a 19p rise to 447p. Most of the early froth was wiped off in later trading as SG, among others, said sell. BT fell 17p to 1063p despite being tipped in a new Goldman Sachs portfolio, which also includes Unilever and the Swiss drug group Novartis.

Supermarkets were left on the shelves as rumours of an earnings-threatening price war grew louder. Asda, unchanged at 155.5p, is apparently preparing an assault on its rivals by slashing grocery prices. The campaign is tipped to hit Tesco, down 4.7 per cent to 168.75p, and Safeway, 6p lower at 262.25p. J Sainsbury, 1p higher at 361.5p, and Somerfield, up 5.5p at 380p, are seen as more resilient.

Marks & Spencer kept falling from grace and ended an undignified 8.25p lower at 411.25p. The retailer was on the receiving end of a 70-page "sell" note by the broker WestLB. The title of the pamphlet "It's going to be painful" said it all.

No such doom and gloom among the undercard. The FTSE 250 got one over its bigger brother, rising 10.1 to 5,258.4, the Small Cap scraped 1.3 higher to 2,278.6.

Bid speculation and good results caused all the joy. First Choice, the tour operator, travelled 16 per cent higher to 180p, after admitting an approach. The talk is of a bid at between 175p and 180p with the UK rivals Airtours, up 18.5p to 495p and Thomson, which rose 11.5p to 180.5p, among the favourites.

The German giant Preussag, which has a stake in Thomas Cook, and the Swiss travel group Kuoni Reisen could provide the foreign opposition.

The Mirror bid potboiler was given new impetus. The red-topped paper's shares rose a headline-grabbing 9p to 203p, after it rejected a 210p a share offer by Trinity. The bid put the heat on Regional Independent Media, the regional publisher, and the backer Candover to increase their 200p approach.

RMC built a 29.5p advance to 709p as JP Morgan said "buy". A bid for fellow building materials producer Alexander Russell, up 15p at 137.5p, is near. No bid fluff for Aggreko. The power hire group, once part of Christian Salvesen, surged 15p to 198p simply because it posted good results.

No such luck for BTP. The much-restructured chemicals group plunged 20p to a five-year low of 296.5p. The tumble put it on top of the mid-cap's list of fallers as sellers stepped in ahead of the results season.

Some of its rivals fared little better, with Laporte down 18p to 547.5p and Yule Catto down 0.5p to 250.5p. The chemistry between the market and the sector is all wrong and at these bargain-basement levels bids are more than likely. Burmah Castrol was the notable exception, putting on 44p to 859p after promising a pounds 280m return of cash to shareholders and reporting good profits.

BICC got out of its awful telecommunications cables business, with $133m in cash, but the shares, once in the Footsie, fell 5.5p to 84.5p.

Close Brothers, the blue-blooded bank, bled 32.5p to 632.5p despite good results and the appointment of former Warburg's supremo David Scholey as the new chairman.

Horace Small, a uniform-maker, was the market's best stock in the market, posting a 54 per cent advance to 79.5p after selling its operating business and becoming a cash shell ready for a reverse takeover.

Trio, the money broker, cashed in a 2p rise to 9.25p after Nittan Capital bought almost 30 per cent from Regent Pacific at 10.25p.

ComputerInd crashed 59.5p to 100.5p after a profit warning, while Synstar, the computer services company, shed another 20p to 138.5p. It was floated on Friday at 165p.

SEAQ VOLUME: 867.2 million

SEAQ TRADES: 81,042

GILTS INDEX: 112.90 -0.74

OFEX-LISTED Po Na Na, an operator of African theme bars, rose 2p to 102.5p after it unveiled merger talks with the rival chain, Break for the Border, up 1.5p at 42p. Break for the Border will have to pay more than pounds 20m to take control of Po Na Na, which owns 15 venues across the country.

The African bars' company floated in 1996 and has a market value of pounds 21m. It has talked to other quoted companies, which could enter the fray if the BfB talks collapse.

MIXED NEWS for Chiroscience. The biotechnology company soared 8.5p to 234p on news that its anaesthetic Chirocaine is due to be approved by the US drug regulator. However, the product was dropped by Zeneca, the pharmaceutical giant, to appease the EU regulators that approved its merger with Astra.

Chiroscience is on the look-out for a new partner and in the meantime Zeneca will pay for the development of the drug.