London shares take fresh battering

Shares on the London stock market suffered another sharp fall yesterday leaving investors nursing their worst two-day loss since the run-up of the Iraq war.

The FTSE 100 index of leading shares closed down 70.8 points, or 1.2 per cent, at 5,841.3, having earlier slumped 156 points to 5,755.4 - its lowest since February.

The London market was dragged down by its dependence on global mining stocks, which fell back as commodity prices retreated from their record highs.

The price of gold, base metals and oil all suffered sharp falls as traders cashed in profits amid growing fears of an unsustainable speculative bubble.

The FTSE 100 has lost slightly more than 200 points, or 3.3 per cent, since Thursday evening, making it the worst points loss in two days since September 2002. The fall marks a dramatic end to a pronounced bull run over the past few months, driven by booming world demand, soaring commodity and oil prices and an insatiable appetite for UK companies for foreign investors.

The FTSE hit a peak of 6,133 in late April, up from a trough of 3,500 in March 2003, meaning it has lost almost 300 points, or 4.8 per cent, in three weeks.

"It is worth remembering how far and how strongly the market has risen over the last three years so a setback of 5 per cent is not too worrying in itself and a further retrenchment is possible," said Crispin Finn, the UK equity portfolio manager at Credit Suisse.

There was some relief for investors as the dollar rebounded after last week's sharp falls. Official figures showed that foreign investors were still snapping up US assets, reassuring the fragile markets. The euro fell almost 1 per cent to $1.2830, moving further away from the psychological important $1.30 barrier that could have triggered a fresh sell-off in the dollar. New figures showed $69.8bn of net capital flowed into US assets in March, which was sufficient to cover the US trade deficit of $62bn for that month.

The bounce in the dollar put a floor under the stock market. The Dow Jones was in positive territory at midday yesterday in New York after suffering a 1.7 per cent loss last week.

As the dollar rose the gold price, which is seen as an alternative investment in times of turmoil, slumped 3.4 per cent, or $24.30, to $687.50, taking it below the key $700 mark.

Base metals prices tumbled as traders decided to cash in their profits after the runaway boom of recent weeks. Copper, which has almost doubled in price since the start of year, was down 8.8 per cent. The metal, which has a range of industrial uses, fell to $7,700 - more than $1,000 below its high of $8,800 set last Thursday. Aluminium and zinc were also off.

Analysts said that growing speculation about a bubble building up in the market had prompted investors to cash in.

Edward Meir, a metals analyst at Man Financial in New York, said: "We would let the dust settle here before getting back into any of the metals at this stage. This latest correction could run for some time longer."

Yesterday's movements will do little assuage fears that the 8 per cent fall in the dollar is the first of a disorderly unwinding of the global imbalances. The US has built up a record current account deficit while Asian nations such as China have amassed huge surpluses. Economists agree any adjustment must include a fall in the dollar but have no idea whether it can be achieved without a shock as the falling exchange rate forces up import prices - and possibly interest rates.

Jeremy Batstone, the director of research at Charles Stanley stockbrokers in London, said: "The dollar decline will be significant and the US locomotive will slow appreciably."