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."

Jacqueline Bisset has claimed that young women today are obsessed with being 'hot', rather than 'charming', 'romantic' or 'beautiful'
New Zealand fly-half Aaron Cruden pictured in The Zookeeper's Son on a late-night drinking session
Liam Payne has attacked the media for reporting his tweet of support to Willie Robertson and the subsequent backlash from fans
peopleBut One Direction star insists he is not homophobic
Arts and Entertainment
A bit rich: Maggie Smith in Downton Abbey
tvSeries 5 opening episode attracts lowest ratings since drama began
Arts and Entertainment
Ben Affleck stars as prime suspect Nick Dunne in the film adaptation of Gone Girl
filmBen Affleck and Rosamund Pike excel in David Fincher's film, says Geoffrey Macnab
Arts and Entertainment
Lena Dunham
booksLena Dunham's memoirs - written at the age of 28 - are honest to the point of making you squirm
Life and Style
fashionThe supermodel on her career, motherhood and Cara Delevingne
Life and Style
A new app has been launched that enables people to have a cuddle from a stranger
techNew app offers 'PG alternative' to dating services like Tinder
Greg Dyke insists he will not resign as Football Association chairman after receiving a watch worth more than £16,000 but has called for an end to the culture of gifts being given to football officials
ebooksAn unforgettable anthology of contemporary reportage
Arts and Entertainment
Jake Quickenden sings his heart out in his second audition
tvX Factor: How did the Jakes - and Charlie Martinez - fare?
premier league
Frank Lampard and his non-celebration
premier leagueManchester City vs Chelsea match report from the Etihad Stadium
Arts and Entertainment
Rachel, Chandler and Ross try to get Ross's sofa up the stairs in the famous 'Pivot!' scene
Arts and Entertainment
'New Tricks' star Dennis Waterman is departing from the show after he completes filming on two more episodes
tvOnly remaining original cast-member to leave crime series
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

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

iJobs Job Widget
iJobs Money & Business

COO / Chief Operating Officer

£80 - 100k + Bonus: Guru Careers: A COO / Chief Operating Officer is needed to...

Senior BA - Motor and Home Insurance

£400 - £450 Per Day: Clearwater People Solutions Ltd: **URGENT CONTRACT ROLE**...

Market Risk & Control Manager

Up to £100k or £450p/d: Saxton Leigh: My client is a leading commodities tradi...

SQL Developer - Watford/NW London - £320 - £330 p/d - 6 months

£320 - £330 per day: Ashdown Group: The Ashdown Group have been engaged by a l...

Day In a Page

A roller-coaster tale from the 'voice of a generation'

Not That Kind of Girl:

A roller-coaster tale from 'voice of a generation' Lena Dunham
London is not bedlam or a cradle of vice. In fact it, as much as anywhere, deserves independence

London is not bedlam or a cradle of vice

In fact it, as much as anywhere, deserves independence
Vivienne Westwood 'didn’t want' relationship with Malcolm McLaren

Vivienne Westwood 'didn’t want' relationship with McLaren

Designer 'felt pressured' into going out with Sex Pistols manager
Jourdan Dunn: Model mother

Model mother

Jordan Dunn became one of the best-paid models in the world
Apple still coolest brand – despite U2 PR disaster

Apple still the coolest brand

Despite PR disaster of free U2 album
Scottish referendum: The Yes vote was the love that dared speak its name, but it was not to be

Despite the result, this is the end of the status quo

Boyd Tonkin on the fall-out from the Scottish referendum
Manolo Blahnik: The high priest of heels talks flats, Englishness, and why he loves Mary Beard

Manolo Blahnik: Flats, Englishness, and Mary Beard

The shoe designer who has been dubbed 'the patron saint of the stiletto'
The Beatles biographer reveals exclusive original manuscripts of some of the best pop songs ever written

Scrambled eggs and LSD

Behind The Beatles' lyrics - thanks to Hunter Davis's original manuscript copies
'Normcore' fashion: Blending in is the new standing out in latest catwalk non-trend

'Normcore': Blending in is the new standing out

Just when fashion was in grave danger of running out of trends, it only went and invented the non-trend. Rebecca Gonsalves investigates
Dance’s new leading ladies fight back: How female vocalists are now writing their own hits

New leading ladies of dance fight back

How female vocalists are now writing their own hits
Mystery of the Ground Zero wedding photo

A shot in the dark

Mystery of the wedding photo from Ground Zero
His life, the universe and everything

His life, the universe and everything

New biography sheds light on comic genius of Douglas Adams
Save us from small screen superheroes

Save us from small screen superheroes

Shows like Agents of S.H.I.E.L.D are little more than marketing tools
Reach for the skies

Reach for the skies

From pools to football pitches, rooftop living is looking up
These are the 12 best hotel spas in the UK

12 best hotel spas in the UK

Some hotels go all out on facilities; others stand out for the sheer quality of treatments