Stocks on Wall Street have fallen sharply on fears of an interest rate rise and inflation, and a warning to banks from the chairman of the US Federal Reserve, Mr Alan Greenspan, to prepare for a loss of investor confidence.
The Dow Jones industrial average - which fell almost 200 points at the opening rose and fell throughout the day before finishing down 266.9 at 10,019.71, a fall of 2.59 per cent.
The Nasdaq composite index of mainly high-tech stocks plunged even more dramatically at the opening by 102 points but later recovered some of these losses to close at 2,731.83, down 75.01, a fall of 2.67 per cent.
Treasury bonds also fell over fears about higher inflation and an early rise in interest rates.
This latest slide came after a partial recovery on Thursday from two days of heavy selling which pushed the Dow down by 416 points early in the week and almost 10 per cent beneath its 1999 high of 11,326 on August 25th.
But yesterday's trading opened with all the signs of panic selling as the market digested the breaking news that wholesale prices had risen 1.1 per cent in September - much more than anticipated and their fastest rise in nine years. For many investors this signalled an inflationary push that would ensure an interest rate rise next month.
At its last meeting, the Fed avoided raising rates but indicated strongly that it might be necessary before the end of the year. It meets again on November 16th.
Mr Greenspan increased jitters with his speech the night before, in which he warned that the record high stock prices had increased the risk for investors and lenders and that banks and other financial institutions should boost their reserves to cope with any market panic selling.
This warning echoed Mr Greenspan's famous comment two years ago on the need to guard against the "irrational exuberance" of the markets. The Dow plunged 2.3 per cent the next day but the market soon recovered confidence and is about 60 per cent higher now. This time investors seem more ready to heed Mr Greenspan. At a conference sponsored by the Comptroller of the Currency, Mr Greenspan said the "key question" is whether the recent decline in so-called equity premiums is permanent or temporary. "If it proves temporary, portfolio risk managers could find that they are underestimating the credit risk of individual loans based on the market value of assets and overestimating the benefits of portfolio diversification," he said.
As a consequence, said Mr Greenspan, banks and other financial institutions must "set aside somewhat higher contingency resources, reserves or capital" to cover potential losses. Earlier, European markets also closed sharply lower following these comments and Wall Street's weak opening. Frankfurt's DAX index followed three days of one percentage point declines with a further 0.7 per cent loss. In Paris, the CAC 40 fell 1.3 per cent, while in London, the FTSE 100 index dropped through the 6,000 level, falling 132.1 points or 2.2 per cent to 5,907.3.
In Dublin, the ISEQ index dropped 1.5 per cent, with CRH being the main loser, dropping 68 cents to €18.42.
The dollar fell sharply, hitting seven-month lows against the euro, and dropping rapidly against the yen and sterling.
With the 12th anniversary of Black Monday in sight, some traders saw echoes of 1987 when a falling dollar, rising US trade deficit and rising bond yields prompted a stock market crash.
