The answer lies, as ever, on Wall Street. After London closed last night, US share prices staged a useful recovery that augurs well for the UK market on Monday.
US mutual funds, fostering the legend of a 'wall of money', began to divert vast amounts of their cash inflows away from Wall Street and into Europe, Asia and almost all of the world's emerging stock markets this summer. Eventually, the rise in share prices this provoked was bound to falter.
The trouble started in the US Treasury bond market. Yields on government bonds have risen nearly half a percentage point in the past fortnight as a succession of economic statistics has suggested that the US recovery is back on track.
While this might seem to be good for equities, Wall Street was largely banking on this recovery coming through. But since falling interest rates have been the main driver behind equity markets this year, a rise in bond yields has jangled nerves slightly.
The trauma has spread round the world and London caught the back-draught yesterday. The good news is that institutional selling in London was very small.
Inflationary pressures in the US remain subdued, so Wall Street may soon recover its nerve. There is nothing to undermine the UK outlook, so recent falls look a buying opportunity.Reuse content