Markets fear Bloody Monday

STOCK and bond markets around the world are braced for a wave of selling and price markdowns tomorrow after Wall Street's spectacular 171-point plunge on Friday.

The worst of the US nosedive came late on Friday evening, long after markets closed in London, creating the prospect of a sharp fall as dealers elsewhere in the world scramble to catch up.

The Far East will be tested first. Speaking from Tokyo, Gerard Lyons, chief economist with the Japanese bank DKB International, said: "Undoubtedly the bond market here and the equity market to a lesser extent will be badly hit by the fall on Wall Street."

He said there was "a lot of negative sentiment around", although he believed fears in Japan of a rise in interest rates were misplaced.

In London, the FT-SE 100 index of leading shares could initially fall by more than 100 points, market watchers suggested. Patrick Foley, chief economist at Lloyds TSB, said: "I wouldn't be surprised if the Footsie fell by 2 to 3 per cent first thing, and perhaps ended the day 1 per cent down, but that really is gazing into a crystal ball."

Ian Harwood, head of strategy at Kleinwort Benson Securities, said: "Obviously markets worldwide are going to be intensely nervous on Monday. I think bond and share prices will be marked sharply down, but I don't think it's another 1987. It is all driven by the US bond market, which seems to be in a state of funk."

The FT-SE 100 fell 47.9 points to 3,710.3 on Friday, despite the positive news of a quarter-point cut in base rates. Most of the fall on Wall Street came after London markets closed. The 171.24 collapse in the Dow Jones Industrial Average to 5,470.45 left Wall Street reeling. It was triggered by news of much stronger than expected February jobs figures - virtually ruling out any further cuts in US interest rates for the next few months.

"People are in something of a shock," remarked James Solloway, research director at the US consultancy Argus Research, after the close of markets on Friday.

The US bond market fared even worse, with the price of the benchmark 30-year Treasury bonds down a stunning 33/32 and the yield up from 6.46 per cent on Thursday's close to 6.72 per cent. It was the worst single- day fall in bond prices since August 1990, when Iraq invaded Kuwait.

While few analysts on Wall Street expect the crisis to repeat itself on anything like the same scale, the echoes of 1987 are uncanny. That crash came on a Monday with a dramatic 508-point slide on the Dow Industrial Average; it had been presaged by a miserable Friday, which entered a loss of 108 points.

Indeed, this Friday's sell-offs of stocks was the third most dramatic in Wall Street history.

Those anxious to preserve some perspective - and discourage panic - quickly noted, however, that in percentage terms, Friday was really only a blip. The decline in stocks represented barely more than 3 per cent of the market as a whole, whereas the 1987 collapse was of 22.6 per cent.

Still, many US analysts speculated that Friday may have signalled the beginning of a serious correction in the market that may take it down a full 10 per cent over the next few days before buyers are able to regain the upper hand.

"It was long overdue for a correction, and we're getting it," suggested Bill Raffert, a technical analyst at Smith Barney.

Not everyone was convinced the losing streak would continue, however. "I think the market today [Friday] was a prelude to nothing," insisted David Alger of the Fred Alger Management.

"It was just a knee-jerk reaction, and on Monday we will see the market going up again."

The Japanese authorities were this weekend playing down the significance of the Wall Street fall. The newspaper Nihon Keizai Shimbun reported a Finance Ministry official saying that "this sort of fall will probably not have a big effect on Japan".