Three days of troublesome economic data finally proved too much for the stock market. After shrugging off Tuesday's higher-than-expected retail prices numbers and Wednesday's pick-up in average earnings, a surge in retail sales growth was the final straw.
The volume of sales in May grew by 1.7 per cent, bringing the annual rate up to 4.6 per cent. A good part of the increase was due to a rebound in clothing sales after April's poor weather, but the markets were in no mood to make allowances.
"Just when it looked as if the interest rate sentiment could hardly get worse, retail sales recorded a monthly increase five times market expectations," commented Mr Adam Cole, UK economist at HSBC Securities.
"Abstracting from the monthly distortions, annual sales growth of 4.6 per cent is well beyond what the monetary policy committee will feel comfortable with, particularly as sales a year ago were boosted strongly by windfall-related spending."
The feeling that British interest rates were set to rise again was highlighted in the foreign exchange markets, where sterling once again came close to the DM3 level. It closed at DM2.9959 in London, up 2.5 pfennigs on the day.
That represented more bad news for Britain's exporters, who had started to perk up when sterling fell below DM2.90, and the industrial-heavy FTSE 250 index fell for the seventh consecutive day, dropping 24.2 points to 5,659.2. Its cumulative loss over the period is more than 300 points.
The FTSE 100 index had rallied by more than 100 points on Wednesday on the back of the sudden reversal in the fortunes of the yen, prompted by intervention by the Bank of Japan and the US Federal Reserve.
The news had sparked a strong run in most world stock markets, on easing of the immediate fears of an Asian collapse. And, after Asian stock markets had risen strongly again overnight, Footsie opened firmly, reaching its best for the day of 5,871.4, up 38.7, in the first quarter hour of trading.
But the retail sales numbers put paid to the rally and Footsie fell steadily, reaching the day's low of 5,769.0, down 63.7, just before Wall Street opened. A steady performance from New York allowed the bluechip index to close just 20.6 down at 5,812.1. The FTSE SmallCap index ended 3.1 off at 2,709.1.
Some analysts are unconvinced that the Asian-inspired rally could last long in any case.
Mr Mark Brown, head of economics and strategy at ABN Amro, said that "if you think what's going on in Asia is fundamentally-based, then a few billion dollars of intervention won't make much difference. It is very difficult to believe that the rest of the world will be resistant to Asia's problems. The mechanism through which those problems will be transmitted is the impact on corporate earnings."
ABN Amro is cutting its corporate earnings forecasts and now predicts no growth in non-financial earnings this year.
Volume was 881.8 million shares by the 6 p.m. count, of which 54 per cent was in non-Footsie stocks.
Far East-linked stocks were the focus of busy trading but the response from traders produced a mixed picture.
HSBC, which soared yesterday, fell to profit-taking and crumbled 25p to £15.15, Standard Chartered lost ground and headed 4p south to 670p, while Reckitt & Colman lifted 3p to £11.87.
However, EMI Group, which initially fell, gained 4 1/2p to 532p, Smiths Industries reversed 8p to 844p and Schroders slipped 29p to £16.31.
Shares in Zeneca jumped 77p to £26.25 on fresh speculation over a possible merger with Sweden's Astra.
Meanwhile, Glaxo Wellcome eased 6p to £17.69 and SmithKline Beecham cooled 4 1/2p to 731p.
