Shares volatile as rally loses steam

Traders on the New York Stock Exchange

Stock markets have fallen back after shares across the world surged on Monday in the wake of a deal to tackle Europe's debt crisis.

In London, shares fell 1% after rising 5% on Monday, while in Paris, they lost 0.7% after soaring 9% the previous day.

Analysts had expected shares to slip after such large gains. Stocks in the US and Germany saw small rises.

UK gilt yields also rose slightly, suggesting political uncertainty in the UK is unsettling investors.

The yield is used as a measure of UK government borrowing costs.

Start Quote

Creditors may be a bit jumpy about how long it is taking to form a new government, but they don't appear to be anywhere near going on a lending strike”

End Quote Robert Peston BBC business editor

However, the latest issue of gilts on Tuesday indicated that demand remained strong, with the issue being two-and-half times oversubscribed.

The government wanted to borrow £2.25bn, while investors offered to lend £5.6bn.

Coalition talks

The pound initially fell against the dollar, losing almost half a cent to $1.4815 by 1200 BST, but then rose sharply to $1.4935.

It has also continued to strengthen against the euro to 1.1753 euros, as the eurozone currency lost ground after Monday's gains.

Last week's UK general election failed to give any party a clear majority.

The Conservatives have been talking to the Liberal Democrats about forming a coalition government, but on Monday it emerged that Labour and the Liberal Democrats had also started talks.

But suggestions that a Conservative-Liberal Democrat deal is close appear to have boosted confidence in the pound.

Loan deal

Any doubts about the formation of a new government have not yet had any major impact on share prices in the UK, with the falls in London being in line with those on other major European markets.

The falls are being seen as a reaction to the large gains seen on Monday, which were driven by the 750bn-euro ($975bn; £650bn) loan-guarantee deal agreed by the European Union and the International Monetary Fund on Sunday.

"Markets are giving up a portion of yesterday's sharp gains as some of the bailout-fuelled euphoria in Europe has died away," said David Jones at IG Index.

The loan deal was specifically designed to stop the debt crisis in Greece from spreading to other European countries with high levels of debt, particularly Spain and Portugal.

Markets were surprised by the size of the deal, and so responded very positively to it.

However, concerns remain that the underlying problem of governments having too much debt will take much longer to resolve.

"As the dust settles from yesterday's shock and awe bail-out package, the realisation that this is a sticking plaster to a much deeper-rooted problem has slowly permeated through," said Michael Hewson, analyst at CMC Markets.

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