View from City Road: Europe victim of US excess

Bubonic plague has got nothing on the ability of financial markets to spread fear around the world. Yesterday brought another of those famous Wall Street sneezes, prompting heavy falls in bond and equity prices throughout the world's financial centres. The FT-SE 100 share index closed more than 45 points off, even though there was hardly any volume to justify such a fall.

In theory, there is no reason why European bond and equity markets should jump every time something happens in America. In practice immunity is as elusive as ever. Unlike Wall Street, London share prices hardly look overvalued. The FT-SE 100 index is more than 15 per cent off its peak, while the Dow Jones index is still within 5 per cent of its high. With 10-year gilts trading on a yield of 9.12 per cent, London bonds also look better value than for ages.

But to no avail. European markets have become victims of US excess. With the US economy showing no sign of slowing, interest rates and inflation have nowhere else to go except up. That in turn tends to drive US savings back into more traditional instruments, depriving European markets of the dollars 100bn feed they have been getting annually from US mutuals.

There are also other reasons why synchronisation of European and American markets might seem more justified now than it has been. Economic cycles on either side of the Atlantic have come back into harmony, after a lengthy period when interest rates were moving up on one shore and down on the other. Now both European and American investors are worrying about higher inflation and higher interest rates.

Even so the hold the US has over other markets seems excessive. London analysts can find plenty of companies to recommend. Corporate earnings forecasts for 1995 are being shaded down in the light of a slightly disappointing interim season, but the changes are small. The British economy, unlike the American, is not building up an inflationary head of steam.

None of these things seem to make much difference. While the outlook remains so worrying in the US, London will remain under a cloud. That long dreamed-of decoupling of US and European markets is still just a dream.