Rate fears send shares diving: Footsie plunges to lowest in eight months - Worries fuelled by worsening outlook for US inflation

THE STOCK market ended its worst week since the crash of 1987 with another sharp fall yesterday, as the FT-SE index of 100 leading London shares dived below the key 3,000 barrier for the first time since September last year.

An unexpected upward revision to US inflation figures deepened pessimism in the markets over prospects for interest rates, triggering falls in bond and equity markets around the world. Hans Tietmeyer, president of the Bundesbank, also warned that German interest rates would not be cut again for the time being.

The Footsie closed 53.3 points down on Thursday's close at 2,966.4, a drop of 1.77 per cent in the day. The market has fallen by more than 160 points since the beginning of the week, the worst fall since the crash of October 1987 when the market dropped by 506 points in a single week.

The slump in London shares came after official US figures showed an unexpected upwards revision in first-quarter inflation and growth. US gross domestic product grew at an annualised rate of 3.0 per cent in the first quarter against an initial estimate of 2.6 per cent. Inflation, as measured by the fixed-weight price index, climbed to an annualised rate of 3.1 per cent from 2.9 per cent.

Reacting to a change in the fixed-weights price index was most unusual for financial markets which usually react to the implicit price deflator, the leading inflation indicator in US GDP figures. These were unchanged in the latest revisions.

Gerald Holtham, of Lehman Brothers in London, said this simply underlined the bearish market mood. 'They are fixing on whatever's going to give them the bad news they are looking for.'

Other explanations cited for the stock market's weakness included the high yields offered on gilts, the flow of new share issues from companies raising funds and the threat of measures in the next Budget to discourage dividend payments.

Trading was relatively thin with big institutional investors - such as pension funds and life assurance companies - staying on the sidelines ahead of the long weekend. The market was propelled downwards more by trading in the futures market, where dealers gamble on the level of the FT-SE 100 in the next weeks and months.

Technical analysts said that the next important psychological barriers for the market were 2,950 and 2,900. Some dealers fear overseas selling could kick in next week as international investors rebalance their portfolios away from London now that the market has fallen below 3,000.

US long-dated bonds dropped by almost a point amid fears that the Federal Reserve would soon be forced to raise its target for the Federal Funds rate again.

Alan Greenspan, the Fed chairman, yesterday lent weight to these fears when he left the door open to future rate increases. He told the US Senate Banking Committee: 'To be successful, we must implement the necessary monetary policy adjustments in advance of the potential emergence of inflationary pressures, so as to forestall their actual occurrence.'

The fall in UK share prices frustrated some leading UK equity strategists. Bob Semple of NatWest Securities said it looked as if the market would demand evidence of earnings and dividend growth before a new bull run could emerge.

Paul Walton of James Capel criticised the futures-driven decline and called for circuit breakers in the UK futures market, similar to those operating in the US.

'I am a bull of the UK market, company figures are very good, profits are being upgraded but most of the market is on holiday or on strike.'

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