Investors hoping for calm on London market

Investors were today hoping for an element of calm on the London market when trading commences this week.

Experts are predicting that a rally on Wall Street on Friday, which saw the Dow Jones Industrial Average recover more than 100 points from the day’s lows, should help see a bounce back across Europe.

However, analysts warned any upswing could be short lived with volatility in equity markets set to continue as concern over a global credit crunch intensifies.

David Jones, chief market analyst at CMC Markets, said: “We saw quite a bit of a recovery on Wall Street on Friday and this should help European markets tomorrow.

“But it would be naive to think the worst is behind us. It wouldn’t be surprising to see the market test the 6,000 barrier next week.”

The FTSE 100 Index lost 3.7% on Friday – its biggest percentage fall in four years – shedding around £60 billion from the value of London’s leading companies.

The benchmark index has now dropped around 10% since its peak in June amid fears about about banks’ exposure to losses in the collapsing US sub-prime mortgage market.

These concerns have spread to the wider credit market as banks take a more cautious approach to lending.

Last week, national banks including the European Central Bank and the US Federal Reserve poured emergency funding into credit markets for the first time since the 9/11 terrorist attacks in 2001.

The move came after French bank BNP Paribas froze three funds with heavy exposure to the US debt market, blaming a drying up of credit. The news was seen as further evidence that America’s mortgage crisis had spread around the world.

While the move by central banks provided some relief to markets by helping to increase liquidity, there is also a danger that it will be taken as a signal that there is a wider underlying problem which could further add to investor uncertainty currently underpinning the market volatility.

Clem Chambers, chief executive of stocks and shares website ADVFN expects the Footsie to open up by around 50 points on Monday, with investors gaining confidence from the pick-up in the US.

He said: “We would expect the FTSE 100 Index to open up, but this is likely to be only a temporary bounce with market set to be all over the place for the next 10 days at least as sub-prime mortgage problems roll into the greater mortgage market.”

He warned that the market could fall by as much again.

“The volatility is so large which suggests that the current correction could be very big. We could see the market return to the lows of last May.”

He added that movements in the Chinese and other emerging markets would be key in sealing the fate for equity markets across Europe.