City Calls For calm As FTSE Threatens To Fall Furhter
Andrew Murray-Watson
The three-week drop in the FTSE 100 was offset only on Friday after the US Federal Reserve cut the rate at which it lends to banks by 0.5 per cent – a move that led to shares in London rising over 200 points in afternoon trading.
Mr Bolton said: "My advice is not to panic. But it is going to be a difficult few weeks for the market."
The FTSE 100 index closed the week marginally up at 6064.2, a rise of 0.4 per cent.
It is believed that the Financial Services Authority, the City regulator, is pressing banks to disclose how badly they have been hit by the US sub-prime mortgage crisis. Analysts think more announcements of losses could trigger further falls in global equity markets, despite attempts by central banks to prop up institutions by ploughing billions of dollars into the money markets. A spokesman for the FSA declined to comment on whether it had ordered banks to make disclosures.
Earlier on Friday, the Federal Reserve tried to justify its decision to cut borrowing rates for banks, after it had earlier said it would not act purely for the benefit of Wall Street.
The Federal Reserve's Open Markets Committee said: "Financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth."
Other leading economic strategists echoed Mr Bolton's comments that markets would remain extremely volatile.
Robert Talbut, chief investment officer at Royal London Asset Management said: "We still don't know how serious the problem is. We have had no clear confessions from institutions."
The Federal Reserve chairman Ben Bernanke has warned that the crisis in the US sub-prime lending market could cost up to $100bn (£50bn). However, the fall in the value of shares in London alone could easily exceed that figure, with hedge funds being forced to pay back loans from banks as liquidity in the market dries up.
On Friday, actuaries Lane Clark & Peacock said £27bn had been wiped off the value of UK FTSE 100 pension funds, plunging schemes back into the red. And fears are growing that a "contagion" may spread from financial markets into other "real world" sectors of the economy that rely on consumer spending.
The Bank of England will come under renewed pressure not to raise interest rates beyond their current 5.75 per cent in light of the dramatic slump in the value of equities in the UK.
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