Volatile equity markets bounce back: Change of mood among bond dealers spreads to shares in New York and London, leaving prices higher

A TURNAROUND in the US credit markets finally broke the siege on Wall Street yesterday, with investors deciding that a week of selling had left both bonds and shares undervalued.

The change in mood helped to lift the London stock market from a near 40-point fall during the morning, leaving the FT-SE index of 100 leading London shares to close 29.8 points higher on the day at 3,116.2.

The 30-year US Treasury bond had gained almost a full point by the time the share market opened for trading, and the New York Stock Exchange was once again obliged to limit computer-arbitrage trading - this time banning program buying instead of selling, as was the case in the six previous sessions.

The trading collars were triggered less than 10 minutes into the session when the Dow Jones Industrial Average soared more than 60 points, more than recovering Monday's losses. The Dow rose from that point for most of the rest of the day - gaining 82.06 to 3,675.41 by mid-afternoon - as investors rushed back into high-profile cyclical issues such as General Motors, Caterpillar and Microsoft.

While the US Commerce Department did release its leading economic indicators early in the day, suggesting economic slowing for the first time since last summer, most economists said the figures did not appear to have moved the markets. With the US long bond yielding as much as it did when President Clinton took office, and share prices off 10 per cent from their January highs, investors decided that the sell-off - triggered by fears of further rises in interest rates to combat rising inflation - had been overdone.

Late in the day, the yield on the long bond had fallen to 7.32 per cent, the first easing in a week. But few on Wall Street yesterday were willing to say the 'correction' was over. 'I think we're oversold enough to get a temporary rebound,' said Philip Roth, technical analyst at Dean Witter Reynolds. 'But no one is talking about a bull market any more.'

The gilts market again underperformed overseas government bond markets, but was lifted from its lows by the performance of US Treasuries. In London during the morning ultra-long gilts were pounds 2 lower, but recovered later. The benchmark 63 4 per cent 10-year gilt ended the day nearly pounds 1 2 lower at pounds 947 32 , yielding just over 7.5 per cent.

Don Smith, of Midland Global Markets, said the pound's healthy performance on the day suggested that overseas investors had not been depressing the market. 'I would have expected an outperformance by gilts,' he said.

The pound closed 1.84 pfennigs higher against the mark at DM2.5002, but dropped by nearly 2.5 cents against a strong dollar to close at dollars 1.4625. The pound rose by 0.1 against a basket of currencies to 79.3 per cent of its 1985 value.

Dealers will pay close attention to the monthly money supply details from the Bank of England today, which should suggest how much money the Bank spent propping up the market in February.

Meanwhile, evidence emerged that fears over the impact of tax increases may be driving a growing number of companies to the wall. The number of companies going into receivership rose by 5 per cent to an 11-month high of 262 in March, according to the receivers Touche Ross.

'The reversal may herald an increase in the rate of business failures, primarily, I believe, reflecting the current lack of confidence in the economic recovery,' Ralph Preece of Touche Ross said.

But there was better news on trade, with export confidence among manufacturing companies at its highest for two years, according to a survey by Gallup, the research organisation. But one-third of the 500 companies surveyed during March said that some British companies were increasing prices so aggressively that they were in danger of pricing themselves out of the world market.

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