Unable to settle down after last Friday's shocking dive, stocks on Wall Street were swooning again in early trading yesterday while the bond market also took a renewed beating amid fresh signs of a strengthening in the US economy.
Shares in London and other European stockmarkets followed New York's lead. The FT-SE 100 index ended 35 points lower at 3639.5, reversing a positive start. Shares fell too in Paris, Frankfurt and Milan, while bond prices were lower across the continent.
The pound fell 42 cents to $1.5198, and fell nearly a pfennig to DM2.2496.
In another wild and unforeseen gyration, the Dow Jones industrial average flirted with a 95-point loss before lunch-hour yesterday before regaining some ground once again. Coming out of Friday's 171-point slide, the index had confounded expectations on Monday by staging a 110-point comeback.
The early sell-off yesterday was sparked by fresh troubles on the bond market, where the price on the benchmark 30-year long bond was down by a full point by noon with the yield rising once more to more than 6.7 per cent.
Bond traders were apparently reacting to several reports indicating new resilience in the economy, including figures showing an increase in chain store sales last week. A Federal Reserve survey, meanwhile, pointed to improving indicators of manufacturing growth in February, the first such increase since September. It was a report showing a surge in new non-farm jobs in the US and a sharp drop in the unemployment rate that first set the Dow on its roller-coaster ride last Friday. Yesterday's surveys are compounding expectations that the Fed will no longer contemplate any interest rate cut this month.
"I think that signs of strength is what knocked the market down," Elliott Platt of Donaldson, Lufkin & Jenrette said yesterday.
While already volatile, the US markets may become still more unpredictable later this week, when the US government is due to issue its February inflation and output statistics. Any sign of an uptick in inflation pressure could send stocks and bonds into a greater tizzy.
Analysts expect small rises in prices at the factory gate and consumer level, and a moderate rebound in industrial output after a weather-related dive in January. Some fear that production figures, due on Friday this week, will echo the shock from the rise in employment reported last Friday.
Even today's UK statistics for unemployment in February and underlying earnings growth in the year to January could deliver an unpleasant surprise from the market's point of view.
The City consensus is that there will be a decline of about 5,000 in the unemployment claimant count and no change in earnings growth from 3.25 per cent. Bigger numbers on either count would renew concerns about whether last week's reduction in the cost of borrowing was really needed to stoke the economy.
Market report, page 20