MARKET REPORT: Talk of gilt market difficulties send stocks tumbling

Shares and government stocks nose-dived as rumours swirled of difficulties in the gilts market. The Bank of England's unrelenting stance on interest rates and sterling's strong performance were other influences which helped push Footsie down 35.3 points to 3,900.4 and lowered government stocks by around pounds 1.

Goldman Sachs confirmed a senior gilts trader, Andrew Duthie, had resigned but denied his departure was related to any particular event.

The market, however, had got hold of a story that the US investment house had suffered big losses following the recent Bank of England auction of pounds 1.5bn of 8 per cent 2,015 stock.

Attempts by Goldman to unwind its gilts position had made the market aware of a large overhang which, it was claimed, helped explain the recent underperformance of government stocks compared with other bond markets.

It had been assumed that last week's interest rate increase would help the stock market, removing some of the fragility from shares. In the event the advance has been poorly received. With the Bank of England piling on the pressure with calls for even higher rates Footsie is more than 90 points below the level ruling before the new era of dearer money was ushered in.

Sterling is adding to the agony; so are higher oil prices. There are already signs the market is trimming some of its more exuberant profit forecasts and if the pound/oil pincer movement continues downgrades are likely to become much more widespread - and more pronounced.

There was also signs of the tail wagging the dog as futures activity became increasingly bearish and volatile with Monday's large trade, which seemed to be banking on a share slump, unsettling traders.

Corporate activity, real and rumoured, which has helped shares hit new peaks is now seen as a two-edged sword with Whitehall seemingly much more inclined to interfere in bids than it used to be.

With this month's Budget adding to the uncertainty London's decoupling from New York looks even more startling. New York is the world's dominant market and London will never be free of its influence. But in recent times it has appeared that only transatlantic falls make a deep impression; gains do not.

New York's overnight record following the Clinton victory did provide a short-lived knee-jerk response but the market was soon deep in gloom, ignoring a strong US opening. Footsie closed at a two-month low.

Waters moved against the tide, largely on hopes of more merger deals with electricity distributors. Thames surged 11p to 553.5p and Anglian 14.5p to 564.5p. Enthusiasm on the electricity pitch was dimmed by what is surely a US sighting shot for East Midlands Electricity, off 15p at 592.5p. Northern fell 7p to 623.5p as US bidder CE Electric raised its stake to 19.9 per cent through ABN Amro Hoare Govett. It acquired 6.5 million shares at 630p.

The generators managed to move ahead again with National Power up 1p to 434p (after 439.5p) and PowerGen 3p higher at 544.5p.

Allied Domecq fell 11.5p to 476p ahead of next week's figures and Compass, the catering contractor, eased 20p to 598p as SBC Warburg placed 12 million shares at 593p.

Kingfisher rose 6.5p to 626p as talk of a cheerful circular went the rounds and Standard Chartered rose 9.5p to 660p on NatWest Securities support.

Holiday shares relapsed after the referral to the MMC. Airtours dived 61.5p to 651.5p and Inspirations 16p to 82.5p.

Another round of profit warnings helped erode sentiment. Applied Distribution fell 25.5p to 37p; engineer Mackie International 31p to 156.5p and Cullens, the convenience stores chain, 2.75p to 18.25p. A cautious statement lowered Verity 3.25p to 33.25p.

Chelsea Village, owning the football club, dropped 11p to 96.5p after the resignation of Peter Middleton.

Booker, the food group celebrated clearance of its Nurdin & Peacock takeover with a 5.5p gain to 402.5p. Panmure Gordon is keen on the shares, putting a 600p target on them. Kwik Save, helped by its unchanged dividend, put on 17.5p to 321.5p.

Brands Hatch avoided the market skid, motoring to 177.5p from its 157p placing. Uno, a furniture retailer, held at 167.5p. Societe Generale Strauss Turnbull is enthusiastic looking for profits of pounds 2.3m this year and pounds 3.5m next.

Builder Bellway placed through Charterhouse Tilney nearly 5 million shares at 323.5p, raising pounds 16m. The shares gained 5p to 342.5p.

TAKING STOCK

Shares of Waverley Mining Finance, down from 116p to 59p this year, are "substantially undervalued", suggests Martin Potts, analyst at stockbroker Williams de Broe. He believes asset backing is 114p a share with listed investments worth pounds 23m and the group's Scottish coal assets pounds 33m.

Jarvis, the construction group which has surged ahead since acquiring one of the rail maintenance companies, rose 6.5p to a 126p peak; the shares were 17p at the started of the year. There is talk the group could be on the verge of another significant acquisition.

Bed and breakfast tax deals are alive and well. Around 110 million British Gas shares went through at 180p as the market closed. BGas held at 189p.