World equity markets fell sharply yesterday, and bond prices rose, in response to disappointment at the outlook for US interest rates and worries about corporate earnings in the face of the emerging markets crisis.
Wednesday's Congressional testimony from Alan Greenspan, chairman of the US Federal Reserve, not only failed to hint at an imminent US interest-rate cut, but dismissed talk of co-ordinated reductions by the Group of Seven leading industrial nations. Investors are worried that, without interest-rate cuts, the crisis that has hit Asia, Russia and Latin America will provoke a recession in the developed economies.
Highlighting the spread of the crisis to Latin American, the Sao Paulo stock exchange in Brazil fell heavily again yesterday down 10 per cent.
Adding to investor concern is evidence that corporate profits are being badly hit by the world's economic problems. Those worries were highlighted by a warning from Alcatel, the French telecommunications group, which dragged down other telecoms equipment and electronic stocks, while in the US analysts continued to downgrade earnings estimates for stocks such as Gillette, which are exposed to the international economic climate.
"As well as the macro-economic issues, you are seeing the overwinding of excessive valuations at the individual stock level," said Mr Albert Edwards, global strategist at Dresdner Kleinwort Benson.
Asia started the equity sell-off yesterday, with Hong Kong falling 3.6 per cent and the Nikkei 225 average in Tokyo declining 2.4 per cent to a 12-year low.
Europe kept up the bearish momentum, with the CAC 40 in Paris falling 5.5 per cent and the DAX in Frankfurt 5 per cent. In London, the FTSE 100 index fell 158.8 to 5,132.9, the fifth worst points fall since the index was set up at the start of 1984. In Dublin, the ISEQ index of Irish shares dropped just 1.5 per cent, although further declines are likely today.
Wall Street headed lower all day yesterday, with the Dow Jones Industrial Average dropping 200 points. By 1 p.m. New York time, the Dow was 205.45 off at 7,884.33 and it later closed at 7,873.77.
Bond and equity prices normally rise together but recently they have parted company on fears of deflation.
The flight from equities into bonds forced yields down sharply across Europe. In Britain, the yield on the benchmark 10-year 2008 gilt fell to 5.0 per cent and the yield on the 7 per cent December 2007 bond fell to a low of 4.97 per cent.
Benchmark German bund yields fell below the 4.0 per cent level to a post-war record low of 3.94 per cent, helped by a weaker-than expected IFO survey of business confidence.
