Markets braced for further slide on rate worries

DIANE COYLE

London

DAVID USBORNE

New York

Financial markets are expected to plummet when they reopen this morning after Friday's dramatic decline on Wall Street, echoed in London before it closed for the weekend.

Analysts predict an opening drop of 50-100 points in the FT-SE 100 index after Friday's 48-point fall to 3710.3. A further decline in the Dow Jones index, which fell 171 points to 5,470.45 on Friday, would take London even lower.

On Wall Street, analysts are braced for further losses on the stock and bond markets, though few expected Friday's mini-meltdown to develop into a full-blown crash. The worst anyone was predicting was a 10 per cent decline of the Dow Jones industrials by the end of the slide.

"The market has been so strong over the last year, a decline of 10 per cent should not be a surprise to anyone," noted Arnold Kaufman, editor of the Standard & Poor's Outlook newsletter. "I think this is the 10 per cent decline, but not the end of the bull market. I think an investor should probably ride it out."

The Tokyo stock market is also likely to fall sharply. It is already overshadowed by concerns about whether the package to write off dud housing loans can be passed before the end of the financial year in two weeks' time. Japanese investors are also expected to sell dollars, according to Stephen Hannah, director of research at the Industrial Bank of Japan. He forecast that "the dollar will be in trouble" and this could knock on to the pound.

The sharp sell-off in shares at the end of last week, which followed figures showing a far bigger than expected increase in US jobs in February, reflected the view that hopes for lower interest rates have been overdone. With important economic statistics on both sides of the Atlantic due this week, the markets could be volatile.

Steven Bell, director of research at Deutsche Morgan Grenfell, said that the equity market was overvalued "because it has been assuming we will get the best of both worlds - strong profits growth and lower interest rates. Now it is becoming clear that we will get one or the other."

Mark Cliffe, international economist at HSBC Markets, said: "Markets will be under a lot of pressure this week. People have gone back to the drawing board with their views about interest rates." The end of May was now the earliest opportunity for another move.

Figures on UK industrial output, unemployment and earnings this week, along with US inflation and production statistics, will provide crucial evidence about the strength of the British economy. If they suggest the slowdown in growth is coming to an end, following recent evidence that consumer spending and the housing market are picking up, hopes for any further reduction in the cost of borrowing will be dashed.

Some economists already think the Chancellor's decision last week to reduce base rates by a quarter point to 6 per cent was a cut too far. Mark Brown, head of strategy at the broker Hoare Govett, said: "Policy priorities have shifted towards getting the economy going rather than controlling inflation." Futures markets signal that base rates are now expected to rise later this year.

One key figure this week will be underlying growth in average earnings, due on Wednesday. This has stuck at 3.25 per cent for six months despite an upward trend in pay settlements during that time, and most analysts expect it to remain unchanged. However, a combination of higher settlements and higher financial sector bonuses this year could soon ratchet the figure up to 3.5 per cent.

The latest report from the independent researchers Incomes Data Services comments: "When figures are published for February 1996 they will show that huge bonuses were being paid out in the City of London based on last year's trading."

New figures today from the Finance and Leasing Association reveal high demand for both business finance and consumer borrowing. In January, demand for "big ticket" finance - for capital projects worth over pounds 5m - was 64 per cent higher than a year earlier at pounds 64m. For general business investment, demand was 29 per cent higher at pounds 676m.

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