London holds firm as panic spreads to Asia
Tuesday 12 March 1996
and DAVID USBORNE
London held the line in the face of overnight panic selling on Asian bourses yesterday, with the FT-SE 100 index of leading shares falling just 35.8 points to close at 3674.5. That compared with a lunchtime low of 81.2 points down and weekend fears that markets were preparing for a re-run of 1987's meltdown.
By the time Wall Street opened yesterday afternoon sentiment had swung completely, with the Dow swiftly clawing back 31 of the 171 points it lost last Friday in a selling frenzy that convinced many the US market's long party was finally over.
Last week's sell-off was in response to an unexpected jump in US non- farm payroll numbers, which appeared to shut the door on further interest rate cuts in America. But by yesterday New York analysts had come to the conclusion that a stronger economy would actually be good for corporate profits.
William LeFevre, an analyst at Ehrenkrantz King Nussbaum, said: "The average point drop Friday was two for each Dow stock. That's not the end of the world. We're not worried about a recession or inflation and we're not looking at an economic disaster."
Market watchers were playing down the scale of last week's sell-off, comparing the 3 per cent decline with the record 22.6 per cent plunge in October 1987.
Dealers in Europe had braced themselves for another sell-off yesterday but there was no feeling that a repeat of the 1987 global crash was on the cards. A signal of an apparent change in market sentiment was the calm reaction to data showing strong US house sales, although they indicated the same trend seen in Friday's jobs figures.
Bob Semple, markets analyst at NatWest Securities, poured cold water on the worst scare stories: "There was an over-reaction on Friday and there has now been time to reflect. There is no real crash on the cards. If people had been in a really bearish mood, they would have alighted on the strong US housing data as another reason to sell. I'm reasonably sanguine about the outlook."
But in the Far East, the combination of Wall Street's fall and the heightening tension between China and Taiwan wreaked havoc on Asian stockmarkets. Hardest hit was Hong Kong, which suffered its worst fall since 1987 after the Chinese Foreign Minister Qian Qichen said Taiwan's first direct presidential elections on 23 March were part of a plot to win independence for the island.
Peking takes over control of Hong Kong from Britain in July 1997, and the renewed tension over Taiwan has done nothing to calm local investors' fears about the handover.
The Hang Seng index of Hong Kong's blue chips plunged 7.3 per cent as sellers focused on fresh Chinese military exercises off Taiwan. It closed 820.34 points lower at 10,397.45, the second largest one-day points loss and the Hong Kong market's fifth biggest percentage collapse.
Tokyo, which had opened relatively firmly, took its cue from Hong Kong, falling to the year's closing low of 19,796.29, a drop of almost 2 per cent as buyers remained sidelined by worries over the budget impasse as well as Wall Street. Shares in Singapore and Sydney also lost more than 3 per cent on the day.
Friday's Wall Street retreat was sparked by surprisingly strong February jobs reports, including a drop in the unemployment rate from 5.8 to 5.5 per cent. The figures in turn buried hopes of any further cut in interest rates by the US Federal Reserve. Bonds suffered their worst day in almost two decades.
But by the evidence of yesterday morning, at least, it appears that most investors believe the trend of the US stock market remains upwards. "The market is proving this morning that it's trying to go higher," remarked William LeFevre. "Friday was not the end of the a bull market and the beginning of something bad."
Even so, market observers think Wall Street is likely to remain jumpy all week. Attention will be closely focused on the bond market, where prices recovered a little yesterday, even though the January house-sales figures showed a surprising jump of 4.2 per cent when analysts had expected a drop. Also critical, will be US inflation figures due to be released on Thursday and Friday.
"I think we're entering a much more interesting market, a much more volatile market," commented Ricky Harrington, an analyst at Interstate-Johnson Lane. "I believe the market is changing character.
Steven Leuthard of Leuthard Asset Allocation Fund noted: "This isn't a bear market, but there is one out there somewhere."
Comment, page 19
What the pundits say
Nick Knight, Nomura
`A bounce on Wall Street after the decline was pretty inevitable. But it might have been better in the long run if there had been a genuine bloodletting now. If the market goes up now there is a danger that people will take the chance to sell - there could be a reaction to the reaction to the action.
Bob Semple, NatWest Markets
`There was an overreaction on Friday and there has now been time to reflect. There is no real crash on the cards. If people had been in a really bearish mood, they would have alighted on the strong US housing data as another reason to sell. I'm reasonably sanguine about the outlook.
`This is not like 1987, or 1994 when the bond market crashed. The outlook for the markets is not as negative as it was then nor as negative as some people now think it is. There is still scope for European interest rates to fall, and they are certainly not going to go up.
A grinding downward move in the US need not hit the European markets. There have been 11 corrections of more than 10 per cent in the US in the past quarter century. Europe has gone up in 5 cases. When it went doem it was either because of a global event like the invasion of Kuwait or a short sharp correction like the 1987 crash.
Corey Miller, Societe Generale
`There is a lot of volatility in the markets because we are at that stage of the economic cycle where prospects are hazier. There is a risk of another correction as long as there is that volatility. But the fundamentals are still very good - we have a steady growth, low inflation environment. There is a lot of underlying strength in the US economy.
Trevor Greetham, Merrill Lynch
`Last Friday's jobs figure was a rogue number, yet the market jumped on it as evidence that the US economy had turned on a sixpence. We think the economy will slow and expect further interest rate cuts. The worry for equities is that earnings growth will be affected, disappointing investors and there is a lot of nervous money invested on Wall Street.
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