Turmoil could trigger a Wall Street crash

Events in Asia might be the catalyst for the long-awaited retrenchment in New York. Diane Coyle reports

The attack of nerves on the New York, London and other European stock markets yesterday brought new warnings that the crisis in the Far East could combine with growing fears of an increase in US interest rates to trigger the long-awaited retrenchment on Wall Street.

Gail Dudack, equity strategist for investment bank UBS in New York, said: "There are many parallels between 1987 and 1997 but what has been missing so far is the catalyst for the correction. This turmoil in Asia could be it."

"We have started to see signs of a contagion effect. Events in Asia might be the trigger for a correction on Wall Street which could have a dramatic impact on the American economy," said Mark Cliffe, chief international economist at HSBC Markets.

Concerns yesterday focused on Hong Kong, seen as a source of bigger spillovers to the rest of the world's markets. Experts believe its economy is relatively healthy and its currency under less threat, but for many UK and US investors selling their Hong Kong holdings is the only way to rapidly reduce their exposure to the region as a whole.

The Asian crisis is showing no signs of stabilising despite emergency interest rate rises and a $16bn (pounds 10bn) IMF-led rescue package for Thailand. Economists say more adjustment is needed, while unhelpful comments from Malaysia's Prime Minister in particular have bred distrust among foreign investors.

The crisis will affect the G7 economies through a variety of channels, but most directly through the impact of slower growth on their imports. The interest rate increases and government spending cuts with which Thailand, Malaysia and Indonesia have had to try to defend their currencies will put the brakes on their economic growth.

For instance, in Thailand, where the crisis originated, most economists have slashed forecasts for this year's growth from around 7 per cent to only 2 per cent, which implies no more economic expansion this year.

This will hit Japanese sales to the rest of South-east Asia the hardest. More than 40 per cent of total Japanese exports go to the region. But it also accounts for 17 per cent of the value of US exports and 6.5 per cent of UK exports.

"This will hamper the growth of the Japanese economy, which was already looking very anaemic," said Stephen Lewis of London Bond Broking. The latest monthly trade figures showed its exports to countries like Thailand already dropping precipitously.

Tokai Bank yesterday warned that the Japanese economy was heading back for recession, with the risk of a collapse in the Nikkei to 9,500 increasing. According to economist Graham Turner, the economy remains mired in bad debts.

Japanese banks are heavily exposed to potential bad debts in other Asian countries. Their banking systems in turn are far less robust than that of Mexico, which successfully weathered its financial crisis three years ago.

Although the direct impact on the US and European economies is likely to be much smaller, Stephen Hannah, head of research at IBJ in London, said there would be ripples from weaker Asian growth. "It is alerting us to the threat to corporate earnings from a slowdown in the globe's most significant dynamic region," he said.

Richard Kersley at BZW predicted that the effects could be serious for some industries where Asian demand had been particularly strong, such as bulk chemicals and paper.

More serious still could be the blow to market sentiment dealt by the plummeting share prices and currencies in the Far East. Ms Dudack said: "US markets have factored in nirvana, assuming the world is in perfect balance and earnings will continue to grow. This complacency is being shaken."

Mr Kersley agreed: "These events represent a wake-up call for equity markets where valuations have become extreme."

But few would commit themselves to predicting a full-blown stock market crash, with all its reverberations for the economy.

Mr Lewis said: "It is hard to say how serious this is." But he added: "For the moment the Asian markets look bottomless."

Start your day with The Independent, sign up for daily news emails
Life and Style
love + sex A new study has revealed the average size - but does that leave men outside the 'normal' range being thought of as 'abnormal'?
Arts and Entertainment
TV
Voices
The Palace of Westminster is falling down, according to John Bercow
voices..says Matthew Norman
Sport
Steve Bruce and Gus Poyet clash
football
News
Graham Norton said Irish broadcaster RTE’s decision to settle was ‘moronic’
TV
Arts and Entertainment
Jake and Dinos Chapman were motivated by revenge to make 'Bring me the Head of Franco Toselli! '
arts + ents Shapero Modern Gallery to show explicit Chapman Brothers film
Arts and Entertainment
Kurt Cobain performing for 'MTV Unplugged' in New York, shortly before his death
music Brett Morgen's 'Cobain: Montage of Heck' debunks many of the myths
ebooks
ebooksA special investigation by Andy McSmith
Life and Style
life
Sport
Brendan Rodgers
football The Liverpool manager will be the first option after Pep Guardiola
News
Amazon misled consumers about subscription fees, the ASA has ruled
news
Arts and Entertainment
Myanna Buring, Julian Rhind-Tutt and Russell Tovey in 'Banished'
TV Jimmy McGovern tackles 18th-century crime and punishment
Arts and Entertainment
Paul Whitehouse as Herbert
arts + ents
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Sales Executive - OTE £40,000

£15000 - £18000 per annum: Recruitment Genius: This is a great opportunity for...

Austen Lloyd: Law Costs HOD - Southampton

£50000 - £60000 per annum + Excellent Salary: Austen Lloyd: An outstanding new...

SThree: Recruitment Resourcer

£20000 - £21000 per annum + uncapped commission: SThree: As a graduate you are...

Ashdown Group: Junior Application Support Analyst - Fluent German Speaker

£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

Day In a Page

Syrian conflict is the world's first 'climate change war', say scientists, but it won't be the last one

Climate change key in Syrian conflict

And it will trigger more war in future
How I outwitted the Gestapo

How I outwitted the Gestapo

My life as a Jew in wartime Berlin
The nation's favourite animal revealed

The nation's favourite animal revealed

Women like cuddly creatures whilst men like creepy-crawlies
Is this the way to get young people to vote?

Getting young people to vote

From #VOTESELFISH to Bite the Ballot
Poldark star Heida Reed: 'I don't think a single bodice gets ripped'

Poldark star Heida Reed

'I don't think a single bodice gets ripped'
The difference between America and Israel? There isn’t one

The difference between America and Israel? There isn’t one

Netanyahu knows he can get away with anything in America, says Robert Fisk
Families clubbing together to build their own affordable accommodation

Do It Yourself approach to securing a new house

Community land trusts marking a new trend for taking the initiative away from developers
Head of WWF UK: We didn’t send Cameron to the Arctic to see green ideas freeze

David Nussbaum: We didn’t send Cameron to the Arctic to see green ideas freeze

The head of WWF UK remains sanguine despite the Government’s failure to live up to its pledges on the environment
Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Set in a mythologised 5th-century Britain, ‘The Buried Giant’ is a strange beast
With money, corruption and drugs, this monk fears Buddhism in Thailand is a ‘poisoned fruit’

Money, corruption and drugs

The monk who fears Buddhism in Thailand is a ‘poisoned fruit’
America's first slavery museum established at Django Unchained plantation - 150 years after slavery outlawed

150 years after it was outlawed...

... America's first slavery museum is established in Louisiana
Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

The first 'American Idol' winner on how she manages to remain her own woman – Jane Austen fascination and all
Tony Oursler on exploring our uneasy relationship with technology with his new show

You won't believe your eyes

Tony Oursler's new show explores our uneasy relationship with technology. He's one of a growing number of artists with that preoccupation
Ian Herbert: Peter Moores must go. He should never have been brought back to fail again

Moores must go. He should never have been brought back to fail again

The England coach leaves players to find solutions - which makes you wonder where he adds value, says Ian Herbert
War with Isis: Fears that the looming battle for Mosul will unleash 'a million refugees'

The battle for Mosul will unleash 'a million refugees'

Aid agencies prepare for vast exodus following planned Iraqi offensive against the Isis-held city, reports Patrick Cockburn