UK and European stock markets regained substantial ground after suffering their biggest intra-day falls since the US-led invasion of Iraq, following the terrorist attacks across London. Wall Street trading was subdued, but turned positive by the close while Asian markets showed little reaction to the attacks on Friday.

In Tokyo, the Nikkei 255 average fell 0.23 per cent at the start of trading on Friday but soon recovered to close the morning session at 11,653.26, up 0.54 per cent. Stocks were boosted by the yen’s continuing weakness against the dollar and strong prospects for the retail sector.

Australian stocks were broadly flat, with the ASX 200 up 0.01 per cent by midday.

In Hong Kong, the Hang Seng index was up 0.1 per cent to 14,038.22 at 11:01am, with most sectors steady. HSBC, which accounts for roughly one-third of the blue-chip index weighting, lost 0.16 per cent to HK$123.30 after its ADR closed down 1.03 per cent in New York overnight.

In Europe, markets recovered some ground by the end of trading on Thursday, partly on relief that the impact of the blasts had not been worse.

In the initial reaction, the pound tumbled to an 18-month low, while yields on 10-year gilts fell to a two-year low. Oil prices initially slumped by about $2 a barrel on worries that the attack might dampen economic growth. At the same time, there was a rush by investors into safe haven assets such as bonds, gold and the Swiss franc.

All these moves were partly reversed in later trade.

Stephen Pope, head of equity research at Cantor Fitzgerald, said there had a “big flight to safety and quality” in early trading. But some confidence subsequently returned to markets, particularly after Wall Street opened with more limited losses.

In equity markets, the FTSE 100 fell by 1.4 per cent, or 71.3 points, to 5,158.3, its largest one-day fall since August 6 last year. The FTSE had earlier fallen to a low of 5,022.1 – a drop of 207.5 points or 4 per cent. This was its biggest intra-day fall since March 12, 2003 at the start of the invasion of Iraq, when the market benchmark tumbled 4.8 per cent.

The leisure, beverages, consumer and hotels sectors suffered the greatest falls, but shares rallied sharply from intra-day lows. Among the biggest falls were British Airways(down 4.2 per cent), Diageo (down 4 per cent) and Dixons (down 2.2 per cent).See more on London stocks

The FTSE Eurofirst 300 Index of leading European shares also fell, closing down 1.36 per cent or 21.09 points at 1136.12. Earlier in the day it had touched a low of 1,107.49. See more on European stocks

On Wall Street, the S&P 500 index closed up 0.25 per cent at 1,197.87, reversing small losses earlier in the day, while the Dow Jones Industrial Average also moved up towards the close to finish 0.31 per cent higher at 10,302.290. The Nasdaq Composite gained 0.34 per cent to close at 2,075.66.

Strategists pointed out that the longer-term market impact of the blasts might be muted, pointing to a rebound in European shares following the Madrid terrorist attacks last March, after an initial sell-off. They added that markets had been coming to terms with living with the threat of terrorism, just as they had during the height of the IRA attacks in Britain.

Equity markets have also been bolstered by expectations that the blasts might put further pressure for interest rate cuts in Europe, particularly in the UK.

The Bank of England on Thursday decided to keep interest rates unchanged at 4.75 per cent for the 11th month in succession but economists said a cut was more likely in August. The European Central Bank also decided to hold rates unchanged yesterday.

Stuart Fowler, head of UK equities at Axa Investment Managers, said market reaction to the blasts had been “understandably measured.” “Unfortunately, have had to become more used to these things, “ he said. Mr Fowler said the longer-term reaction would depend on what the investigation into the blasts revealed and whether there any follow-up events.

Paul Niven, head of strategy at F&C Asset Management, said history suggested that the first day post-terrorist activity is worst for equities and best for bonds. “The next few days typically see today’s performance pattern continuing. The market seems to have been measured in its response . . . suggesting that investors are not getting too carried away with their response,” he said.

“If this is correct, then the longevity of the downturn in equities may be less this time than in the other recent experiences.”

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