After the close of the London market, shares tumbled in New York last night, prompting fears that the bull market of the last two years was heading for a crash-landing. The FT-SE 100 had already closed 66 points lower at 3,632.3, more than 200 points lower than the high point it reached in April. The index spent the day in negative territory, recording an 85.7-point decline by lunchtime and never rising higher than a 45-point fall.
Dealers are braced for further declines today following a second consecutive day of extreme volatility in New York. After trading closed in London, the Dow fell at one point by 166 points, outstripping Monday's collapse, before regaining almost all the lost ground and then tumbling again.
Before the lunchtime plunge, the Dow's early calm was attributed to relatively encouraging economic news from the US government, including a modest 0.1 per cent increase in consumer prices in June, while industrial production posted a solid 0.5 per cent gain in the same period.
But the concerns that triggered a massive 161-point sell-off on the Dow on Monday quickly resurfaced. They included disappointing earnings in the technology sector, the underlying rise in interest rates as well as evidence of a selling trend from the influential mutual funds.
The gyrations reinforced fears that Wall Street may be heading for a bear market after its record two-year ascent. But some analysts continued to caution against panic. "I think that the complexion of the market has clearly changed," Michael Metz, the chief investment analyst at Oppenheimer, said. "But I'm not sure that we are in a crash scenario."
The markets were especially anxious to see the quarterly results of Intel, due to be released late last night after the close.
Although most analysts expected Intel's figures to be relatively positive, it was feared that any sign of disappointment in them could further fuel the pandemonium.
It is believed a full-blown crash is less likely since the introduction of trading curb mechanisms in New York in the wake of "Black Monday" in October 1987 when the Dow slid a wrenching 500 points in just one session. The provisions, known as "collars" or "circuit-breakers" are designed to ensure that cascading losses such as those that occurred on that day cannot happen again.
The trading curbs are triggered whenever the market moves more than 50 points one way or another. Programme trades, that can lead to very large movements in the index, are only allowed to resume whenever a tick occurs in the opposite direction of the dominant trend, whether buying or selling. A 250-point drop in the Dow leads to a suspension of all trading for one hour, while a drop of 400 points mandates a halt in trading of two hours.
Market-watchers were divided over the seriousness of Wall Street's correction for other markets. One analyst in London said: "This has been waiting to happen. Wall Street has been overvalued for a while and while the two markets have become decoupled to an extent the bigger the fall in the Dow the more coupled we will become."
Technical analysts said the signs of a big correction had been clear for months. The ratio of shares rising to those falling had fallen sharply in June, normally a sign an index's rise was running out of steam.
In recent months there has also been a marked outperformance by smaller companies, often a sign of a maturing bull market as investors look ever further beyond blue-chip shares for value. In the first six months of the year the FT-SE Small Cap index rose 15 per cent, compared with a flat FT-SE 100.
Comment, page 17