Markets get jitters as polling day named

The financial markets reacted in time-honoured fashion to the prospect of an election campaign by sending the pound, gilts and share prices tumbling yesterday.

"It was a bit of a knee-jerk reaction," said Bronwyn Curtis, an economist at the City investment bank Nomura. But she warned that the next six weeks would bring more volatility.

Sterling lost more than three pfennigs against the German mark, falling to its lowest level for six weeks, but also fell two cents against a weaker dollar. It ended at DM2.6840 and $1.5875.

The FTSE 100 index closed down nearly 51 points at 4,373.5. Its fall was exaggerated by more than 22 points because of the unusually large number of share prices excluding dividends from yesterday as their payment date approaches. Long-term gilts ended nearly a point lower.

A weak start on Wall Street also helped propel shares in London lower. The Dow Jones index was down 55 points at 6,880.70 by mid-morning, but recovered in closing trade to end up 20 points at 6,955.48.

In a remarkable contrast to the City's traditional attitude to the party, most analysts reckon New Labour can be trusted. "Over the years there has been a feeling that Labour has become a lot more user-friendly as far as the City is concerned," said Neil MacKinnon, chief economist at Citibank.

"There is just a residual fear about what a Labour government might do," said Gerard Lyons at DKB. But he predicted that any narrowing in the party's poll lead would fuel currency jitters because investors expect higher interest rates and a tougher budget if Labour beats the Conservatives.

The wave of important economic data due this week also contributed to yesterday's nerves. Figures due today for government borrowing in February are expected to be favourable thanks to the strong economy, although any sign of an end-of-year surge in public spending could hit gilts.

Figures due later in the week on unemployment, earnings, retail prices, retail sales and industrial trends will be closely scrutinised for any signs of unsustainably fast growth or inflationary pressure.

House prices have continued to rise, according to a survey from the Royal Institution of Chartered Surveyors yesterday. It said a north-south divide was re-emerging, with a shortage of properties inflating prices in the south.

"Nowhere is the north-south contrast sharper than in London and its environs where City bonuses - of a magnitude last seen in the 1980s - are helping to inflate prices in sought-after areas," the report said.

Although no analysts expect the Chancellor, Kenneth Clarke, to take the last pre-election opportunity to raise borrowing costs, after his 10 April meeting with the Governor of the Bank of England, this week's figures could affect the chance of a move straight after the 1 May election.

"The assumption is that Gordon Brown would take Bank of England advice to increase interest rates in order to establish his credibility. Labour is not expected to unveil any nasty surprises on economic policy," said Mr Lyons.

Most of the big international banks and finance houses based in the City see the election campaign as a little local difficulty.

Some currency experts predicted a more difficult ride for the pound, however, because of evidence that the German economy has turned the corner. Greater optimism about the outlook for the Continent's traditional economic powerhouse contributed to the German mark's strength yesterday despite continuing uncertainty about prospects for EMU. Figures due this week are expected to show improved business confidence and retail sales.

Comment, page 21