US rate fears send share markets diving: Pounds 7bn knocked off London values as pre-Budget worries play their part

FEARS that US interest rates may be about to rise and bring to an end the bull market in US bonds yesterday drove down share prices in most leading markets.

The London stock market was also depressed by pre-Budget worries, especially fears that the advance corporation tax credit that pension funds can reclaim on company dividends will be reduced further or eliminated altogether.

Despite thin trading, pounds 7bn was cropped from London share values as the FT-SE 100 index sank 37.4 points to a closing 3,070.6. In New York the Dow Jones Industrial Average closed 23.76 points down at 3,670.25 on persistent worries that the Federal Reserve may soon tighten credit.

On the Continent, share prices slipped in Paris, Frankfurt and Zurich, where investors expressed misgivings over prospects for recovery and higher earnings. The DAX index in Frankfurt lost 47.37 points to 2,030 after money supply figures showed growth unchanged at 6.8 per cent and dented hopes of a further cut in rates next month. In Milan, the Mibtel index fell 470 points to 9,077 after voters in municipal elections abandoned the centre parties of the government in favour of left- and right-wing groups.

In Asia markets were also hit by rising US bond yields. Hong Kong and Sydney fell, while in Tokyo the Nikkei average plunged 556.35 to a closing 17,384.84 as gloom over the recession deepened.

Paul Walton, of James Capel, said: 'Throughout the world there is a great fear that the interest rate cycle is about to turn up in the US.' US bond yields rose sharply last week as better-than-expected economic news heightened fears that rates were about to rise.

Yesterday yields remained close to Friday's levels, with the benchmark 30-year bond quoted at 6.33 per cent.

The downward cycle in US short rates began in 1990, with much of 1992 and 1993 marking the trough. But analysts questioned whether European markets should be so worried about higher US rates, with most European rates still expected to fall further.

Mr Walton and other analysts expect the UK market to recover after the Budget on 30 November and after expectations of another interest rate cut are fulfilled. The threatened end to pension funds' tax credits on dividends will probably hang over the market until the Budget and, if confirmed, could hit prices hard. But most analysts thought the speculation was overdone.

Illustrating earlier investor enthusiasm for equities, net sales of unit trusts hit a record pounds 846m in October, bringing the total for the first 10 months of the year to a new peak of pounds 7.8bn.

Like sentiment in the stock market, consumer confidence remains depressed ahead of the Budget, according to the latest monthly survey by Gallup for the European Commission. Confidence plunged in October, but has only deteriorated slightly in the past month.

Some 38 per cent of consumers now expect the economy to deteriorate in the coming 12 months, compared with fewer than a quarter who expect it to improve. This is the most depressed figure since February.