'Huge cloud of uncertainty' over stock market

One analyst said there remained a "huge cloud of uncertainty" because no one yet knew the exposure of banks and other financial companies to the collapse in US sub-prime mortgages.

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The US Federal Reserve sought to ease some of the jitters in lending markets by announcing a 0.5 per cent cut in the rate it charges banks to borrow money.

That move prompted a relief rally for the FTSE 100 Index on Friday, but there is now pressure for the Fed to prevent a wider economic slowdown by also cutting its main interest rate.

It is next scheduled to hold a rates meeting on September 18, but could act before then.

Business leaders in the UK are also braced for a "big chill" to spread to the UK economy as a result of the recent financial turmoil.

CBI director-general Richard Lambert warned that slower growth in the City would have wider implications for the economy as a whole.

He told the Sunday Telegraph: "We are in for a period of uncertainty as the scale of investment losses becomes clear.

"The underlying British economy is strong, but I'm worried we will inevitably feel the effects of a slowdown in the US and tighter lending conditions."

The CBI estimates that more than 500,000 jobs and 8.5 per cent of the economy depends directly on the City.

However, Mr Lambert warned the Bank of England against cutting interest rates in response.

The former member of the Bank's Monetary Policy Committee said: "There is still inflationary pressure.

"The only justification for intervening would be if there was a real systemic disaster, so my reaction if they did cut rates would be to take it as a bad sign."

Friday's turnaround in financial markets came after the Footsie lost 12.5 per cent in the past month.

The collapse had been fuelled by worldwide concerns about the exposure of financial institutions to the collapse in the US sub-prime mortgage market. These fears have led to a more cautious approach from lenders, putting pressure on credit markets.

Henk Potts, equities strategist at Barclays Wealth, said: "The Fed's actions have clearly helped matters, but whether that's enough to put a floor under these markets is questionable.

"There's a huge cloud of uncertainty out there in relation to issues with the credit markets. For a start we still don't have a clear picture about the level of exposure of financial institutions to the sub-prime market."