Stock market heads for a 'mini crash'

Investors In the UK are bracing themselves for a mini stock market crash tomorrow after shares in America plunged at the end of one of the worst weeks in Wall Street's history.

Investors In the UK are bracing themselves for a mini stock market crash tomorrow after shares in America plunged at the end of one of the worst weeks in Wall Street's history.

European and Asian markets closed before much of the fall on Friday in Wall Street and are expected to be hit hard when trading resumes tomorrow. Millions of pounds could be wiped off shares in the UK, affecting not just investors but also pension fund holders.

Media and technology shares, including those in dot-com firms, are likely to be the worst affected, market analysts predict, but they think the scale of the fall is more likely to be that of a "correction" than a full-blooded crash.

However, Gavyn Davies, Goldman Sachs's chief economist, was relaxed about the sudden downturn in new technology shares. "You can't see share prices going one way forever," he said. "This is very different from a crash. It is just a correction and it would require a much more negative mindset among investors to turn it into a crash."

He said the 1987 crash had led to a 25 per cent loss in the value of the FTSE-100 Index, whereas the losses on Friday in the US markets were between five and 10 per cent. And, in any case, the London Stock Exchange now has "circuit breakers" designed to stop dramatic one-day falls.

Jim Wood-Smith, head of research at Greig Middleton stockbrokers, said: "It is clear our market is going to come down on Monday. There will initially be a very sharp fall in the value of technology shares, which will follow through into the blue-chip companies."

Jeremy Batstone, head of research at NatWest stockbrokers, said he expected the FTSE to fall through the 6,000 mark. "When the US sneezes the rest of the world catches a cold," he said.

The predicted "correction" follows a record fall on the Dow Jones, and Nasdaq Composite Index, which wiped billions off US share values. The Dow Jones plunged 617.78 points, or 5.6 per cent to 10,305.77. At its lowest point, it was down 722 points. The Nasdaq dropped 354.99, or 9.6 per cent, to 3,321.79.

The US markets drop followed a frenzy for technology shares that gave many young, unproven companies a market value they did not deserve.

The fall, which turned to near panic selling, was sparked by a US inflation report. But the speech on Friday by Mervyn King, deputy governor of the Bank of England, hinting that interest rate rises were on the way, may exacerbate the expected drop at the London Stock Exchange.

His comments will heighten expectations among City analysts that the Bank's nine-member Monetary Policy Committee will apply the brakes to the booming domestic economy with a quarter-point rate hike next month.

Mr King, who is known as one of the more "hawkish" members of the committee, the group that sets the UK's interest rates, said: "The message for policy is that it is important not to let domestic demand grow too rapidly for too long. The longer the correction is left, the sharper the required adjustment will be."