View from City Road: Fundamental fears emerge among investors

One theory was that the February shakeout in bond and equity markets was largely driven by speculators operating in the futures markets. But yesterday's fall suggests that there are still plenty of people holding bonds and shares who can be just as easily panicked into selling by adverse economic developments. The longer the decline goes on, the less justification there is for arguing that this is not a fundamental market. The long- term interest rate - the gilts yield - has now risen by a full point since the new year to 7.3 per cent.

Yesterday there was also real news. The Bundesbank's grudging cut in its repo rate deepened market pessimism about a fall in interest rates below 5 per cent in Germany. The Italian bond auction was bereft of buyers and led to sharp price falls in European bond markets, undermining equity markets in their wake.

From across the Atlantic came news of the fastest quarterly growth in 10 years in the fourth quarter, and a sharp hike in manufacturing prices disclosed in the respected NAPM (purchasing managers) survey. The best guess must be that the US economy has clambered on to a higher growth path. American markets sold off sharply on fears of another rise in the Federal Funds rate.

The question for Europe is whether bond markets will go on behaving as if they were merely an extension of Wall Street. Given the respective cylical positions, this is not rational. But neither is it a good background for today's monetary meeting between the Chancellor and the Governor.