America sours rate cut euphoria

W ith the Footsie hovering just above the 5,600 level, market watchers went into last week hoping that even if things had not yet turned, they might at least have calmed down.

With the Footsie hovering just above the 5,600 level, market watchers went into last week hoping that even if things had not yet turned, they might at least have calmed down.

Unfortunately, trading round the world once again tipped record levels of index volatility as markets struggled against a flood of hard-hitting economic and corporate news. At the centre of attention in the UK was the Bank of England's long-awaited interest rate decision. The weight of economic data was clearly in favour of a cut, though the run-up to the event was marked by fierce debate over how big the drop would be, and what comments would come with it.

The result on Thursday was a cautious quarter-point cut to 5.5 per cent and to the lowest benchmark rate level for 16 months. Although widely anticipated, the move briefly acted as a fillip to the UK equity market, which recovered to the level at which it began the week.

But the euphoria quickly subsided. Analysts pointed out that the cut suggested the direct impact of the US economic slowdown on the rate of growth in the UK. The US buys 15 per cent of all exports from Britain, and UK manufacturers have begun to report sharp declines in orders and production for March. Added to that is the correlation between the performance of the UK markets and the goings-on in Wall Street. The Dow Jones has tumbled nearly 10 per cent so far this year, and the Footsie has stumbled by the same amount. As in the US, this has eroded people's savings, and is expected to rear its head soon as a decline in consumer confidence.

Added into the mix was the news that analysts are continuing to viciously downgrade their forecasts for corporate profit growth. According to Dharval Joshi, a strategist at SG Securities, in March a massive 26 per cent of global forecasts were downgrades ­ the highest level in 12 years and much worse than in the Asian crisis of 1998 or the recession years of the early 1990s.

Corporate news was equally rocky. Prudential's attempt to expand in the US by buying its large rival, American General, hit the rocks when its prey received a rival bid from the world's biggest insurance company, AIG. This left the Pru with the choice of upping its bid or walking away gracefully with £400m of compensation money. UK investors had loathed the merger plan from the start, and were only too happy with the counter-bid. The Pru may now be exposed and without any obvious strategy, but nobody seemed to mind and the shares soared by 7 per cent.

The difficulties besetting the technology sector were laid bare by Autonomy at the end of the week. The UK-based maker of information management software said first-quarter sales would probably miss analysts' forecasts of £18m, and would probably be closer to £10m. Already on the slide, the market was in no mood for this, and Autonomy's shares plunged 43 per cent on Friday ­ their biggest one-day fall since listing in October last year.

But Autonomy's day of misery was nothing compared to Wall Street's week of disasters. Heading the list of the damned was the telephone equipment maker Lucent, which spent the five days failing to fight off a strong bankruptcy rumour. In a statement to the market, the company described the speculation as "baseless and irresponsible", but the old Nasdaq hands were not prepared to take the chance. Having dived 60 per cent in February, Lucent shares took another 30 per cent bashing on Wednesday.

Despite the huge one-day rallies prompted by a bullish outlook from Dell, technology shares ended the week mauled by bears. So much so that new-economy titan Cisco finally saw its market capitalisation fall below $100bn for the first time since 1998.

The continuing madness on equity markets spilled over into currencies, where investors looked for safe havens wherever they could be found. Over the past few weeks, the dollar has been perceived as the safest place to be, but the UK interest rate cut created renewed interest in sterling, and in the British economy as a whole. Not knowing where to turn, currency traders finished the week as net buyers of the Swiss franc, which has recovered its old reputation as the safest port in a storm.