City watchdog moves to calm market

The UK's stockmarket watchdog, the Financial Services Authority (FSA), has changed its rules to prevent panic selling of shares by life insurance companies.

Last week's dramatic falls on the FTSE 100 index are believed to have been triggered, in part, by heavy selling of stocks by life insurers.

Under FSA rules, life insurers are forced to sell their riskiest assets, in this case their massive share holdings in blue chip companies, to ensure they can cover all their liabilities.

The new rules will allow the companies to make "their own judgement as to the most appropriate investment strategy... for their own particular circumstances", the FSA said.

London's leading share index, the FTSE 100, fell about 7% during the past week.

Rules already eased

The rules have forced insurers to dump billions of pounds worth of shares in the past two weeks, according to the Sunday Business newspaper, quoting an FSA spokesman.

A report in the Sunday Telegraph, sourced to unidentified fund managers and brokers, said Muenchener Rueckversicherungs-Gesellschaft AG and Swiss Reinsurance Co had begun selling mainly blue-chip FTSE 100 listed shares.

The FSA has already eased rules for insurers since the US crisis began, in an effort to shore up the markets.

It temporarily amended the so-called "resilience test", which life insurers use to check that their funds can withstand falls of 25% or more in share markets.

An FSA spokesman told Sunday Business: "We are actively considering further relaxation of the resilience tests."

Investigations continue

In a separate development, the FSA has asked UK financial institutions to check their records to see if they have done any business with people suspected of being linked to the terror attacks on the US.

On its website, the regulator has posted a list of alleged suspects, which it says are under investigation by the FBI.

The move comes as regulators around the world continue to look for signs that the organisers of the attacks may have profited from it by selling shares beforehand.

Rollercoaster week ahead

Meanwhile, traders are preparing for another rollercoaster week on the world's stock markets.

Despite the fact the government is trying to help the economy, nobody is seeing any data to confirm things will be better

Gideon Bernstein, portfolio manager, Keller Group

In the US, some analysts are predicting a modest patriotic rally, following the wholesale sell off of the past week, which saw The Dow Jones industrial average lose 14.3%, its worst weekly performance since the Depression of the 1930s.

But trade is likely to remain jittery until the outcome of the military build-up in Central Asia and the Middle East becomes apparent.

"A lot of people are panicking right now," said Gideon Bernstein, a portfolio manager at the Keller Group, who oversees $1bn in institutional client assets.

"Despite the fact the government is trying to help the economy, nobody is seeing any data to confirm things will be better."

Recession predicted

Colin Lundgren, a portfolio manager at American Express Financial Advisers, said: "People are still in shock. They don't have a lot of appetite to buy stocks."

Market nerves will not have been calmed by a report from investment bank Merrill Lynch, which said it expects the US economy to fall into recession in the second half of the year.

The bank says US interest rates could end the year as low as 2% from the 3% they now stand at.

European fears

In Europe, recession fears were defiantly dismissed by European Union member states' finance ministers who met over the weekend.

"We're not in recession and we're not going into recession," said the monetary affairs commissioner Pedro Solbes Mira.