Global inflation fears hit FTSE

With global markets tumbling on heightened fears about rising inflation and interest rates, dealers in London were not about to be left out. By lunchtime, the FTSE 100 had lost 125.2 points to 5,495.7, with the fall accelerating during the morning. But once again volumes were fairly light.

The initial spur was a near-100 point slide in Wall Street after London closed last night, with the theme taken up by Asian markets. The Nikkei suffered its biggest one-day points fall since September 11, with technology stocks badly hit and sentiment undermined by news that the Bank of Japan governor had - before his appointment to the post - put money into a fund run by Yoshiaki Murakami, who was arrested for insider trading last week.

Everyone knew it was likely to be a nervous session in London as a result, and so it proved. Investors have become increasingly concerned that rising inflation around the world will lead to higher interest rates, which in turn will hit corporate profits. This morning came evidence to back up that worry, with UK inflation up from 2% in April to 2.2% in May - above the Bank of England's target. In a speech on Monday, Mervyn King, the Bank of England governor, indicated that he was worried about the inflationary threat, particularly from import prices.

Dealers will also be studying US producer price figures, due out later on Tuesday, although the main focus will be on US inflation figures on Wednesday. Recent pronouncements from the US Federal Reserve chairman, Ben Bernanke, have left markets uncertain about how far he feels interest rates will need to rise to combat inflation. He is due to make another speech on Tuesday night.

There is unlikely to be any respite when Wall Street opens, with Cantor Index predicting a 29-point fall on the Dow Jones Industrial Average when it opens.

Henk Potts, of Barclays Stockbrokers, said: "The central question is what happens to inflation, which is being pushed higher round the world because of higher energy bills.

"Central bankers have to be aggressive to combat this but the uncertainty is how aggressive they'll be. Traders are trying to work out how negative this will all be for global growth and company profits. This uncertainly is leading to the current market volatility and it is hard to call the market today.

"The big number, though, is out tomorrow, with the US inflation figures. If there is a big rise, then we'll see further downward pressure in the short term as investors try to work out what that means for US rates and global growth.

"There are also US consumer confidence figures out on Friday - markets will be very volatile until we've had those two numbers, especially the inflation one."

This morning miners were again in the spotlight as metals prices - which had led the way when markets were rising - continued to lose ground. Copper fell to a seven-week low and gold fell below $600, its weakest since April and 19% off its peak a month ago.

Also among the fallers were Kazakhmys, down 6%; the copper miner Antofagasta, 5.5% lower, and Anglo American, which dropped 5%.

A trading statement from Royal Bank of Scotland did little for the shares, down nearly 4%. Xstrata and BHP Billiton were also among the top 10 FTSE 100 fallers.

Alliance & Leicester fell 6% to £10.82 as Crédit Agricole - tipped as a bidder for the bank - launched a bid for the Greek bank Emporiki. Merrill Lynch downgraded its profit estimates after A&L's update on Monday and said it stuck to a £11.71 price target including a takeover premium. But Dresdner Kleinwort Wasserstein raised its rating from reduce to hold.

Most broker notes had little influence in this morning's turmoil. The brewer SAB Miller lost 40p to 911p despite an upbeat assessment from Merrill Lynch. The broker said SAB's 20% decline since April was an over-reaction, and it put a price target of £11.60 on the shares.

Boots fell about 1% to 721p, despite JP Morgan raising its price target from 800p to 850p and saying it was increasingly confident that its forecast of £140m cost-savings from the merger with Alliance Unichem was conservative. Seymour Pierce was less positive after a meeting with the company, saying the share price was at the top of its range and expressing concern about the longer-term impact on the merged outfit of cut-price supermarket drug sales.

The jeweller Signet fell nearly 4% as the market reacted to Monday's after-hours announcement that merger talks with its US rival Zale Corporation had been called off. But Seymour Pierce confirmed its outperform rating on the shares, saying this was always based on the company's fundamental performance rather than bid speculation. It said any weakness in the price was an opportunity to pick up stock.

There were few positive signs around. Even defensive stocks were shunned, although the tobacco group BAT managed to slip into positive territory by lunchtime.

Takeover situations also provided a little support, with the airport operator BAA marginally ahead and Cambridge Antibody - subject of a recommended cash bid from AstraZeneca - also rising a little.

Among the smaller companies, Patientline fell 38% after announcing increased losses of £25m and saying a new management team was looking at the company's whole strategy and operations. Patientline, which supplies telephones and other services to NHS patients in hospitals, faces a government review into the prices charged for incoming calls after Ofcom expressed concern.

But the oil exploration tiddler Ithaca Energy added 2.5% after a positive update, including news that it hopes to drill one of its prospects ahead of schedule.