Wide US trade deficit knocks stock markets: Bonds plunge on fears of increases in inflation and interest

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AN UNEXPECTEDLY large US trade deficit helped to propel share and bond prices sharply lower, amid continued worries about resurgent inflation, excessive government borrowing and rising interest rates.

The FT-SE 100 ended 41.8 lower at 3,037.3, while the yield on the 10-year benchmark gilt clambered back above 9 per cent for the first time in two years. The short sterling futures market registered growing expectations of further rises in base rates, triggered in part by government warnings that there would be no return to the days of 'boom and bust'.

The US recorded a trade deficit of just under dollars 11bn in August after Wall Street forecasts of barely dollars 9.5bn. The deficit with Japan widened to dollars 5.67bn, refocusing attention on the looming deadline for trade talks between the two.

Ron Brown, the US Commerce Secretary said the worsening trade figures reflected lower exports of car components and aircraft rather than an underlying deterioration. These effects were 'superimposed over a deficit already exacerbated by growth differentials between the US and its trading partners that have persisted for too long'. Falling aircraft sales accounted for almost 60 per cent of July's slide in exports.

The trade figures helped to depress the dollar against the yen, although the US currency was given support by rumours of Bank of Japan intervention. The dollar closed in New York at Y97.67. The Dow Jones Average fell 67.63 to 3,869.09.

Peter Stoneham, currency analyst at Technical Data, said: 'I favour a continuation of the slide, central bank intervention permitting, and look to levels around Y97.50 in coming sessions.'

The gilts market had a volatile day, buoyed in late trading by domestic buyers. Gilts had suffered earlier amid talk of heavy Japanese selling of European bonds and Kuwaiti selling of US Treasuries.

The Bank of England announced it would auction pounds 2bn of 8.5 per cent gilts due 2005 on

8 September, the first issue of next year's benchmark stock.

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