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MONEY MARKETING MARKETS: Bank Holiday Blues

Investors will be relishing the long Easter weekend after an extraordinary week that revealed just how jittery the markets really are in the present climate.

Nowhere was that better exemplified than by the mass sell-off of HBOS shares on Wednesday morning following ultimately unfounded rumours that the banking giant had been forced to seek emergency funding from the Bank of England.

“You are dealing with an investor audience that will believe anything right now,” says David Stevenson, co-manager of the Resolution Cartesian UK opportunities fund. “If Bear Stearns, one of the largest banks in the US, can say it has no funding problems at the start of the week and then end the week being sold for $2 a share, it is not beyond the realms of possibility that HBOS could be struggling.”

HBOS shares slumped by as much as 20 per cent in feverish selling on Wednesday morning as the rumour took hold. After closing at 480p the previous day, its shares fell to 398p in early morning trading, prompting both HBOS and the BoE to issue unprecedented denials that it had requested emergency funds.

The FSA announced at lunchtime that it was launching an investigation, saying it was concerned that profiteering short-sellers were behind the rumours.

“The FSA had to say something but rumours by their very nature have no documentation and the regulator has in the past few years singularly failed to take anyone to court for market abuse,” Stevenson adds.

HBOS rallied in the afternoon to close down 34p at 446.25p and recovered a further 2 per cent to 446p by midday Thursday.

“It is a reflection of the current market that confidence falls not just on fundamentals but on rumour,” Stevenson notes, “And we have seen that at various points in the last couple of weeks.”

The firesale of Bear Stearns last Friday battered the markets on Monday, as the FTSE 100 nosedived by 217.3 points to 5414.4- its lowest level since November 2005.

Banks alone accounted for a quarter of the FTSE’s fall with Barclays, HBOS, Royal Bank of Scotland and Alliance & Leicester all down between 7-12 per cent. Miners and oil companies were also among the leading fallers in the day as growing fears of a US recession reducing demand hit the sector hard.

The very same stocks were among the leading risers in a sharp 191.4 point rally on Tuesday ahead of the Fed’s interest rate cut.

The 75 basis points cut, lower than expected, sees US rates drop to 2.25 per cent.

The knee-jerk response soon petered out with the FTSE back in the red on Wednesday and Thursday. Deepening concerns about the US economy led to a mass sell-off in commodities, which dragged the FTSE down 60.2 points on Wednesday.

Gold suffered its worst one-day fall in 18 years, off over 5 per cent, while oil slipped below $100 on weak US demand figures.

This continued into Thursday with eight of the 10 top fallers miners. The FTSE is down a further 1.4 per cent in early afternoon trading.

The fillip of the Fed rate cut proved short-lived again with the credit crunch continuing to bite. Credit Suisse’s surprise profits warning is just another indication of just how deep the problems run.

Newton investment leader, global research, Simon Pryke says the Fed’s rate cutes are not driving a sustained recovery because it does not solve the issue of the lack of credit available to consumers and businesses.

He says: “The cost of borrowing is going up as banks are forced to focus on who they lend to and what they charge. We are seeing bad debts go up in virtually every loan class and many people will find it difficult to renew a loan.”

Stevenson agrees, adding that now whenever the Fed cuts, investors do wonder if they know something that the market doesn’t- particularly following the Bear Stearns debacle.

He points out that even with the rate cuts there is evidence the consumer is slowing down on both sides of the pond.

“This months’ retail figures have held up surprisingly well, but the availability of credit is a problem. Food sales have held up better than non-food sales, which indicates people are focussing on necessities,” he says.

This was in evidence as Comet reported profits down 4 per cent because of poor sales of white goods, while Debenhams saw a minor drift in profits.

With talk of the psychologically important 6,000 barrier seemingly in the rearview mirror, how long before the 5,000 barrier becomes more of a reality?

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