South-Korea effect hits FTSE

Investors ran for cover today as world markets reacted badly to a surprise hike in interest rates in South Korea.

The change heightened fears over higher borrowing costs globally and caused Tokyo’s Nikkei to slump by more than 450 points as traders in the Far East feared the Bank of Japan may follow suit.

There was the inevitable knock-on effect with the FTSE 100 Index down 1.8% or 100.5 points at 5605.8 by mid morning.

The volatility was shared by commodities with sharp falls for the price of copper and gold leading to heavy declines for mining stocks. Xstrata fell 6%, or 113p, to 1823p, while Kazakhmys was off 47.5p to 1009.5p.

Energy stocks were also acting as a drag after the killing of Abu Musab al-Zarqawi, al-Qaida’s leader in Iraq, caused the price of oil to fall below 70 US dollars a barrel. Shell was off 29p to 1781p while BP was 17p lower at 607p.

Only six blue-chip stocks were in positive territory, one of which was Cable & Wireless after it announced plans to focus its Bulldog division on wholesale services for major broadband providers. Investors liked the strategy and pushed the beleaguered telecoms company 2.5p higher at 108.5p.

Airports operator BAA was also heavily traded after a dramatic session for the blue-chip stock.

Hopes were raised of a rival bid from Goldman Sachs, but these were quickly dashed when BAA said it was no longer in discussions. Shares were 5.5p lower at 929.5p as investors settled for Ferrovial’s agreed offer.

Morrisons also gave back some of the strength seen yesterday after speculation it would appoint a new chief executive to take on the duties of chairman Ken Morrison. The company confirmed the reports last night, causing shares to hold their own in a weak market – down 0.25p at 195.75p.