Most traders, market-makers and fund managers have never seen a time like it. After a hurricane of selling at the start of the year and a breathtaking plunge in the FTSE 100, London’s leading stock market index has been suddenly becalmed.

The volume of stock changing hands, already low since the start of the year, has dropped further in the past few weeks. This month the daily volume on the London Stock Exchange failed to reach 1.5 billion. Last August when the credit crunch was beginning to bite, the daily volume was regularly above 2.5 billion.

What has gone wrong? According to James Rose, a senior trader at Citigroup, pension funds have been reluctant to get back into the market, having got their cash levels as high as possible before the fall. The hedge funds have been left as the only players. And they have been forced sellers of short and long positions as banks have made margin calls and as their customers have redeemed funds. The absence of traditional pension funds – long-only players – means that the few big hedge fund orders can drive big changes in the FTSE 100 index.

This week the market has appeared even more becalmed than before. Manoj Ladwa, a derivatives broker at TradIndex, said: “Every day we’ve seen a bit of a rally and then by the afternoon, the FTSE 100 has tended to come back down. People are short-selling FTSE 100 futures.”

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BACKGROUND

• Oil is the key to world recovery

• Banks may need to pump billions into scheme

• UK economic growth weakest for three years

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• Full credit crunch coverage

BACKGROUND

• Happy days are over for UK households

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• George Soros: Crunch will bite deeper in UK

Why are they doing this? The long-only funds are trying to protect their positions. Most can only raise cash levels to about 8 per cent, leaving them invested in an index which many think could yet fall more heavily. Shorting FTSE 100 index futures is an insurance against a slide. Mr Rose said: “When the FTSE rises, the cost of buying this insurance comes down. So it is sensible portfolio management for funds to sell the index as it rises.”

But there may be a second reason for the afternoon sell-off. Several funds believe that the rally is a “suckers’ rally”, based on the false hope that the worst is over when the crisis among the banks is only just starting to spread to the man in the street. There is a fear that Britain, with its heavy reliance on financial services and home ownership, will be squeezed by the credit crunch far harder than even the US.

So, if the UK economy is heading for a big slowdown or even a recession, why is the stock market not falling more dramatically?

Because it is not dependent on the UK economy. While the market values of banks, retailers, leisure and construction and property companies have been devasted, they have been almost exactly countered by the exploding value of mining and oil stocks with operations around the world. These key constituents of the index have been held up by the oil price hitting new records and as the world’s industrial powerhouses – China and India – have yet to show signs that their hunger for raw materials has been sated.

Yesterday, US employment showed fewer jobless than expected. For the first time this week, the market held a proper rally and there was no afternoon sell off. The serious fund money has yet to get back in. It is as if the stock market has been trapped in the still eye of a storm.

— The FTSE 100 index closed yesterday at 6,215, its highest close since January 14. However, the index is 7.97 per cent below its 52-week high of 6,754. The record was set on July 13, 2007, before the credit crisis started to bite

— Traders expressed concern about the low numbers of shares being exchanged in London: “It’s a Bank Holiday weekend – but there is a lack of volume here”

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