CONCERN that the economic outlook across much of Europe might not be as gloomy as feared has hit interest rate hopes and sent financial markets sharply lower. Gilts and shares in Dublin and London ended lower, following the lead set by the US, and Germany.
However, later in the day Wall Street recovered to reach a new record of 5407.69 after the Federal Reserve cut interest rates.
In Dublin, Government gilt prices fell sharply across the board, and share prices were also weaker, with yield sensitive financial stocks feeling the brunt of the selling. Bank of Ireland fell 11p to 442p and AIB was 8p lower on 345p as the financial shares fell by almost 2 per cent. Industrial shares were less affected and price changes were minimal.
However, the fall in the financial shares was enough to lead to a decline of 20.42 points in the ISEQ overall index to 2,312.87.
In London remarks by Mr Howard Davies, deputy governor of the Bank of England, that growth as high as 3 per cent this year was "well within the realms of possibility" followed figures showing the narrow money supply was slightly more buoyant than expected last month.
Cityanalysis do not expect the Chancellor of the Exchequer, Mr Kenneth Clarke, to reduce base rates after his meeting with the Governor of the Bank of England, Mr Eddie George, tomorrow but are still betting on one more quarter point reduction from the current level of 6.25 per cent before midsummer.
Gilts ended over a point lower in heavy trading, while the FTSE 100 index closed down nearly 35 points at 3,746.6.
Stronger than expected German industrial output data for December lowered the prospects of a German rate cut, but German officials warned the figures were likely to be revised down.
Industrial output rose by 0.6 per cent in December from November, and that figure makes a cut in German interest rates less likely in the near future, as it is in line with the Bundesbank's view of the economy.
A rate reduction in Ireland may have to await a German cut, although Dublin one month money market rates continued to trade around 5 per cent.
German shares posted big losses, too, leaving some dealers pointing to the danger of a serious correction following the market's recent strong gains.
The 30 share IBIS DAX index tracked the weak dollar lower in screen based trading, falling 50 points before paring its losses to end about 42 lower at 2,416.
A weak performance by German government bonds yesterday also affected gilts. The bund market fell after figures showing an increase in German output for the second month running in December.
Early on in the day, US treasuries were over shadowed by the prospect of record sales of bonds due this week. The Treasury is due to auction $44.5 billion worth by Friday. The dollar fell below 105 yen due to uncertainty about Japanese interest in the auction, and was down over a pfennig at DM1.4625.
