War fears rattle equity markets

London shares fall to within a whisker of seven-year low as looming Iraq conflict unnerves dealers

Shares in London experienced another sharp downward lurch yesterday as a combination of weak corporate results, poor economic data and uncertainty about war with Iraq hit investor sentiment.

The FTSE 100 index slumped 63.8 points to 3,491.6, closing within a whisker of the seven-year low blue chips touched in late January. The hard economic facts were without doubt gloomy yesterday. US employment registered its biggest monthly decline since November 2001 as February non-farm jobs fell by 308,000, pushing the unemployment rate in the world's largest economy to 5.8 per cent.

Meanwhile, a series of American corporations came out with weak results and gloomy forecasts for 2003. Intel, the world's largest semiconductor maker warned that its first-quarter figures would be flat or slightly lower than those achieved last year. Elsewhere, Interpublic, the world's second-biggest advertising agency unveiled a 79 per cent drop in fourth-quarter profits and warned that earnings in 2003 would fall short of market expectations.

According to analysts, a rate cut by the US Federal Reserve is now looking increasingly likely in order to prevent the American economy dropping back into recession. On Thursday, the European Central Bank was forced into a quarter-point cut as it fought to support the eurozone economy.

Rolf Elgeti, head of equity strategy at Commerzbank, believes that the uncertainty caused by the prospect of war in Iraq is currently one of the major drivers of the stock market and potentially one of the most damaging factors to the global economy. "The uncertainty surrounding war with Iraq is more dangerous for the stock market and the economy then the actual war itself," he said.

He believes companies on both sides of the Atlantic are delaying investment projects as they await to see how the conflict develops, and fears that consumers may start to rein in spending. He believes the combination can only undermine an already faltering US and European economy.

Dealers in London reported volatile trade yesterday. Stocks rallied sharply as reports hit newswires mid-session that two sons of al-Qa'ida leader Osama bin Laden had been arrested near the Pakistan border with Afghanistan. Meanwhile, on Wall Street, the reports caused cheering on the floor of the New York Stock Exchange. An inconclusive update from UN chief weapons inspector Hans Blix, and a 17 March deadline for disarmament left the Dow 66 points higher to close at 7,740.03 after a see-saw day.

In Paris the CAC 40 index closed 2.3 per cent lower at 2,574,9, Italy's MIB30 index lost 1.5 per cent to 21,769.0, while in Spain the Ibex 35 index dropped 1.7 per cent to 5,716.5.

In the UK, economically sensitive stocks were among the worst hit as the building materials group Wolseley fell 5.2 per cent to 450p, the insurer Legal & General dropped 4.7 per cent to 66p and the electrical goods retailer Dixons gave up 3.5 per cent to 81.5p

Most market commentators were expecting a sharp jump in share prices should war with Iraq break out. "We are expecting stocks to head sharply higher should the US launch an attack on Iraq. The main driver of this is likely to be hedge funds rushing to close long held short positions, which have been very profitable in recent months as the market has plummeted", Tom Hougaard, chief stock market strategist at the spread betting firm City Index, said. "After that it will depend on how successful the war is for the US and Britain", he added.

Amid the gloom yesterday, some analysts argued that now is a great buying opportunity for long-term investors. They noted that the yield on the FTSE 100 index has fallen to within a whisker of the yield on UK government bonds. At yesterday's close the yield on the blue-chip index stood at 4.48 per cent while UK 10-year gilts yielded 4.04 per cent. Such a scenario is viewed by some as indicating that equities are undervalued and that investors should take the opportunity to buy.