European stock markets are braced for a white-knuckle ride today when trading opens for the first time since Friday's dramatic falls on Wall Street. Equity strategists say there could be an initial 150 to 200-point drop in London's leading FTSE 100 index in early trading as market makers adjust prices. However, most say the real test will be faced this afternoon when the US markets open.
All eyes will be on the hi-tech stocks that bore the brunt of the sell-off on Friday. The stock markets in Japan and Hong Kong will be the first major bourses to open after Friday's carnage, caused by US inflation data. The Dow Jones Industrial Average plunged by 616 points to 10,307.2, and the technology-dominated Nasdaq dropped by nearly 10 per cent to 3,321.7.
In London, where the FTSE 100 index closed on Friday down 178.9 at 6,178.1, the talk is of "a correction" rather than a "Black Monday"-style meltdown similar to the 1987 stock market crash.
Gerry Holtham, global strategist at Norwich Union Investment Management, said: "We are going to see the knock-on effect from the Far East and some other European markets. The key thing is what happens when New York opens. The Nasdaq could go back to 2,500 and that could cause a problem with margin calls [where brokers call in money lent to investors to buy shares]."
However, Mr Holtham added: "On balance I don't think there will be a fundamental change in investor psychology in the United States. My feeling is that we won't get a total rout."
Michael Hughes, group economic adviser at ING Asset Management, was also positive. He said: "I don't believe it will turn into a rout. I don't see signs of money retreating from markets, so I'd be looking for people to start bottom-fishing. Private investors have been buying on the dips, and it wouldn't surprise me if some start to sell. Institutions may go back into the technology area."
Richard Jeffrey, equity strategist at CCF Charterhouse, said: "When we have seen these big falls in the US on a Friday, the reaction has often been less acute because people have a chance to rationalise what is going on. Certainly there will be an initial markdown. If there is institutional buying after that the market could stabilise."
Kevin Gardiner, European equity strategist at JP Morgan, said: "You can expect market makers to post opening prices down by about 3 to 4 per cent." He predicted a big rotation out of new-economy stocks and into defensive stocks, some of which are trading at "almost recessionary levels".
Justin Urquhart Stewart, of Barclays Stockbrokers, said he saw the current sell-off affecting both hi-tech and old-economy stocks, and that the UK was effectively now in a bear market.
He said: "You could sense a sea change last Wednesday. It wasn't just the technology stocks, but ordinary bread-and-butter stocks which were being hit.
"Everything now hangs on interest rates, which are likely to be going up both in the UK and the US. We will remain in a bear market until interest rates have peaked. It could last just a few weeks, but is more likely to run for several months.
"Private investors who have been speculating in risky ventures will be nervous. But our advice to longer-term investors is: 'don't panic'," he said.
Most equity strategists said the correction could be healthy in the long run, as it would dampen the over-exuberance that has affected some hi-tech share valuations.
Mr Jeffries at CCF Charterhouse said there would be a shake-out in technology stocks as investors become more discerning. He warned that the market for smaller technology stocks "could virtually close down".