Even the bulls take a cautious view of Footsie

With the poetry of round numbers, the FTSE 100 index ended yesterday at exactly 4,000, 15 points lower than Wednesday's record. Experts are divided about whether shares stand teetering on the brink of a big correction from that symbolic level or are simply pausing before surging to new highs.

The common ground is that the most recent gains in share prices in London and New York are due to the Federal Reserve's surprise decision not to increase US interest rates last week. Uncertainty about when that move will take place is what divides the bulls and bears.

Nick Knight, equity strategist at Nomura, said today's jobs and earnings figures for the US would be decisive in the short term. "We're in for a big move. Next week the index will be at least a hundred points from the current level, in one direction or the other."

If the increase in the number of jobs last month turns out to be more than the expected 175,000, fears of an impending rise in rates will return. A lower figure and, "we'll go ballistic", as Mr Knight put it.

New figures yesterday were on the Fed's side, with orders for durable goods dropping 1.9 per cent in August, and an increase of 11,000 to 340,000 in the number of new unemployment claims last week.

The gloomy case for share prices in coming weeks rests on the view that the value of equities has raced ahead of government bonds, thanks to undue optimism about inflation and interest rates. When interest rates do rise to choke off inflationary pressure, stock markets will fall.

The bullish case rests partly on a rosier view of the interest rate outlook, but also on predictions that there will be a strong flow of liquidity into equities. Recent official figures show that institutions put an extra pounds 4.3bn into cash in the second quarter of the year, nearly twice as much as they invested in UK equities.

For all their talk, even the bulls are cautious, their forecasts for the FTSE index at the end of this year ranging from 3,750 to 4,200, compared with the bears' range of 3,600 to 3,700.

The optimists admit there are risks. One is the possibility of higher taxes on the corporate sector either in next month's Budget or after the election.

Another is the danger that a new row over Europe would halt the gains gilts have made, underpinning share prices during the past week. The spread between 10-year yields on gilts and German government bonds has narrowed from 180 to 155 basis points. This element of political risk in the UK could go the other way. Richard Kersley at BZW said: "Any commitment by Labour to join the single currency could be good news because it would bring the gilts spread over German yields down towards zero."

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