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Markets falter amid fears over us rate rise { May 10 2004 } Original Source Link: (May no longer be active)
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Markets falter amid fears over US rate rises
By FT Markets Reporters
Published: May 10 2004 14:21 | Last Updated: May 10 2004 21:46
The Dow Jones Industrial Average closed below 10,000 on Monday on a day of turbulence for stock markets around the world, caused by fears of higher US interest rates and a slowdown in the world economy.
Share prices tumbled in response to Friday's strong US employment data, widely seen as bringing forward the expected interest rate rise from the US Federal Reserve.
The Dow fell 1.25 per cent in New York to close at 9,991.01, the first time the Dow has fallen below 10,000 since December. European markets sank to six-week lows as the Dax-30 dropped 2.85 per cent to 3784.61 and the CAC-40 fell 2.7 per cent to 3553.35.
In London, equity markets were hit by what one senior trader called "a bit of a panic". The FTSE 100 suffered its biggest fall in eight weeks, dropping 2.3 per cent to 4,395.2. Trading volume of more than 3bn shares indicated concerted selling had taken place.
Speaking after a regular meeting of leading central banks in Basel, Jean-Claude Trichet, president of the European Central Bank, said the bankers had "observed nothing that would be worrying" in the rise in bond yields prompted by expectations of rising official interest rates.
But some economists fear that a rise in rates from the Fed will destabilise financial markets and set back global economic growth.
The federal funds rate was cut last year to 1 per cent, its lowest level since the 1950s, to ward off deflation in the US. Now that threat appears to be passing, analysts believe the first US rate rise in four years is approaching - potentially spelling trouble for investors who have been taking advantage of cheap money to take positions in a range of markets.
Charles Dumas of Lombard Street Research said an "echo bubble" had been created by the Fed's attempts at damage limitation after the collapse of the stock market bubble of the late 1990s, and that second bubble now appeared to be bursting.
"The 1 per cent fed funds rate has led people to invest in everything: currencies, stock markets and every commodity they can lay their hands on," he said. "Now the market has begun to anticipate the end of 1 per cent, and anyone in those speculative positions is between a rock and a hard place."
The market falls began in Asia, where some markets suffered their steepest one-day declines since the attacks of September 11 2001.
In Japan, the benchmark Nikkei 225 average fell 4.8 per cent to its lowest level since late February.
Growing signs that the Chinese authorities will take measures to cool down the country's overheating economy compounded investors' fears.
The index of large Chinese companies listed in Hong Kong fell more than 7 per cent, its biggest drop in four years, and the Hang Seng index ended at a seven-month low after recording its biggest daily drop this year.
Emerging market bond prices also slid for the third consecutive trading day. JP Morgan's EMBI+ index was down more than 2 per cent in late European trading.
Commodity prices also suffered some of their sharpest falls so far this year. Gold prices fell to a six-month low of $372 an ounce; copper a three-month low of $2,530 a tonne; and platinum a five-month low of $765 an ounce.
John Llewellyn of Lehman Brothers said market attention would now be focused on the US inflation data released on Friday.
"If that were to come out as a big number, then people might start to say that inflation is in the system. And that would get priced into the markets in expectations of Fed tightening and bond yields."
Reporting by Ed Crooks, Michael Morgan, Stephen Scurr, Michael Neill and Steve Johnson
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