Renewed fears that emerging inflationary pressures might trigger a rise in German interest rates after the next meeting of the Bundesbank Council - scheduled for Thursday week - sparked another Europe-wide fall in stock markets yesterday.
London, where high levels of liquidity mean that the stock market is one of Europe's fastest movers, could not resist the trend and experienced another session of rather exaggerated swings in share prices.
The FTSE 100 index followed up last Friday's 76.9 loss with a further 14.8 decline to 4,886.3, extending the fall over the two sessions to 1.8 per cent.
Sentiment in London was further dented by persistent concerns that the next meeting of the US Federal Reserve's Open Market Committee, due on September 30th, might result in an increase in US rates.
Those fears were behind a weak opening on Wall Street, where the Dow Jones Industrial Average dropped over 40 points shortly after the start of trading.
The UK market's second line stocks and smaller issues, although lower across the board, were never anything like as weak as the leading stocks. The FTSE 250 index finished the day 8.7 off at 4,650.0, compared with a session low of 4,649.3, while the FTSE SmallCap index closed only 0.3 down at 2,253.1.
Dealers complained about the low level of attendance in the market yesterday with many fund managers and market-makers happy to take extended holidays in the knowledge that turnover levels are always down in the period around bank holidays.
"It became clear early on that much of the activity in the market was computer-driven, in other words, it was tracker fund business, which is becoming increasingly a factor in the market," said one equities salesman.
London began the session in resolute fashion, with market makers happy to lift their opening quotations because of the startling recovery on Wall Street on Friday. When London closed for business on Friday the Dow was over 100 points lower, and recorded a 177point fall later in the session. However, a late rally allowed the Dow to finish only 6 points lower, while on Monday it dropped by 28 points.
Up 23 points early on, Footsie suddenly began to give ground, with global bond markets prompting a sell-off in equities across Europe. Footsie quickly relinquished its initial gains and dropped like a stone to post a near-50 point fall around midday, before clawing its way back during the rest of the session.
Gilts provided some support, with the benchmark 10-year issue closing unchanged.
Typically after the bank holiday, turnover in the market was restrained by the low attendance - at the 6 p.m. cut-off point volume in equities was a poor 619 million shares.
