FTSE up 1.9%, but 'fractured' market may lead to decline

London shares swung violently yesterday before closing up sharply as disappointing manufacturing and trade data added to the increasingly uncertain outlook on the economy.

At one point in the day all FTSE 100 stocks were nursing losses, sending tremors of fear through the City as the index was pushed temporarily into bear market territory.

However, buyers seeking out bargain stocks and expectations ahead of last night's US Federal Reserve statement saw the London benchmark regain some of its composure, closing up almost 96 points or 1.9 per cent at 5,164.92.

But analysts warned that sentiment remains "fractured" as the picture on the global and UK economy deteriorates.

Markets were hit by a double whammy of poor economic news yesterday, with the latest UK exports data exposing a widening trade gap in June.

Hopes that Britain would be able to manufacture its way out of the economic turmoil were also dealt a blow by separate statistics showing UK factory output shrank 0.4 per cent in June on a month-on-month basis.

Economists fear that recent turmoil in the equity markets could harm manufacturing even further in the coming months as business confidence drops and companies claw back orders. Today's quarterly inflation report from the Bank of England is unlikely to offer much relief as governor Sir Mervyn King is widely expected to slash growth forecasts for this year.

Pressure is growing on King to kick-start a second round of quantitative easing in Britain, extending the bank's money-printing programme beyond its current level of 200 billion.

ING economist James Knightley said: "The worry is that plunging equity markets will hurt business confidence and lead to firms cutting orders, thus prompting further falls in output. As a result, the prospect of further action from the Bank of England continues to grow."

Data from the Office for National Statistics showed Britain's goods and services trade gap widened to 4.5bn in June from 4bn in May - a high for 2001.

IHS Global Insight economist Howard Archer said UK export prospects were looking "increasingly worrying" given that the global economy "is in grave danger of suffering a protracted, serious downturn".

David Kern, chief economist at the British Chambers of Commerce, warned that UK manufacturers would find it increasingly difficult to compete with overseas competitors given recent events: "Turmoil in the financial markets, and the problems facing the economies of the US and the eurozone, will likely make it difficult for manufacturers to compete internationally."

Although the FTSE 100 ended in positive territory, offering investors a slight reprieve after four days of 100-point-plus losses, conditions remain highly volatile. Continued fears over the eurozone and the US saw the index plummet to 4,791 at one point during trading, wiping out half of the gains made between the lows of 2009 and this year's high of 6,105.Keith Skeoch, chief executive officer at Standard Life Investments, said: "The past week has seen pure emotion dominate financial markets for the first time since the depths of the crisis.

"The dramatic rally in bonds which has pushed yields back towards their post-war lows provides clear evidence that markets have quickly adjusted to a world of slow growth, low inflation and low interest rates."