Markets Plunge Around the World
Analysts opine: "Weakness is strength. War is peace. Down is up."
NEW YORK - Concerns about the future of President Bill Clinton, combined with fears of deflation, chilled stock prices Thursday on Wall Street and across Western Europe, as the dollar weakened.
Major stock indexes in Europe dropped 3 percent to 7 percent, as the Dow Jones industrial average fell more than 300 points on Wall Street. By the close, the Dow had pared its losses to close down 249.48 points, or 3.17 percent, at 7,615.54, not far from the 7,539.07 at which it settled after its 512-point drop Monday last week.
The dollar fell broadly against European currencies, tumbling 3 pfennigs to a 15-month low against the Deutsche mark. Some of the decline may have resulted from speculation that the Federal Reserve Board would push down interest rates.
Investors stampeded into the perceived haven of government bonds. Despite the weakening currency, bond prices soared. The rising prices pushed the yield on the benchmark U.S. Treasury bond to 5.17 percent - the lowest level since the government began selling 30-year issues in the 1970s - from 5.27 percent on Wednesday.
The manic-depressive trading pattern of the past few weeks reflected investor opinions that wavered between the idea that the financial crisis that began last summer in Asia was about to set off a worldwide recession and the concept that equity stock prices have fallen so far since July that they are now at bargain levels. The Dow is about 18 percent below its record close of 9,337.97, set on July 17.
''I have not been able to find any real story behind this,'' said Alan Brown, chief investment officer of State Street Global Advisers. Mr. Brown, who is based in
London, said, ''The only thing I hear is about corporate earnings. I don't see anything specific that has come out that leads anyone to believe that the Asian contagion has hit Latin America big time that would be of concern to the U.S.''
Yet Brazil was the biggest loser, in percentage terms, in the Western Hemisphere, its Bovespa index fell 15 percent, halting trading late in the day. Standard & Poor's Corp. affirmed the country's bond ratings, which are below investment-grade, but said the outlook was negative because of the country's big budget deficit and the flow of capital out of the country to safer havens.
An illustration of the deflationary pressures sweeping world markets was that prices for coffee futures in New York slid as Brazil stepped up exports from a bumper crop. Growers, desperate for cash, are willing to part with their beans for low prices, an effect seen in other commodities markets in recent months. This kind of deflation is especially difficult for emerging markets, which do not have the high-tech and service industries that make up large parts of developed economies. December coffee futures fell to $1.09 a pound in New York, down 4 cents on the day, or 3 percent.
If developing countries cannot get good prices for their exports, investors will continue to shy away from stocks, bonds and other holdings in those nations, slowing down their economies. The fear, Mr. Brown said, was that this could help tip the Western European and North American economies into recession.
He noted that the three largest members of the planned single currency - France, Germany and Italy - are running budget deficits perilously close to the permitted maximum of 3 percent of economic output. Thus the governments of those countries are not in a position to increase spending or cut taxes to foster growth, nor is the new European Central Bank likely to embrace a low-interest-rate policy as it seeks to establish its credentials as a serious inflation-fighter.
Thus, he said, the pressure was on the Fed and, to a lesser extent, the Bank of England, to reduce interest rates to foster economic growth in the United States and Britain, which is not joining the currency union at its inception.
Ron Chapman, head of international equities at Dreyfus Corp., said that although there was speculation in the market that the Fed would cut rates, it was not likely to do so anytime soon.
Alan Greenspan, the Federal Reserve Board chairman, indicated last week that the central bank had abandoned its bias toward raising interest rates, but that did not mean it would rapidly reduce them, Mr. Chapman said. He said analysts were reading too much into Mr. Greenspan's statement that the United States could not remain ''an oasis of prosperity unaffected by a world that is experiencing greatly increased stress.''
Mr. Chapman also said that Mr. Clinton's problems did not have much effect on the U.S. economy. The ''strong constitutional process of succession'' meant that even if the president was forced out of office, there would be no direct consequence on the American economy.
Mr. Brown, while agreeing that Mr. Clinton's problems were not a long-term determinant of the economic outlook or the stock market's fortunes, said that ''given that the United States is the leading political, economic and military power in the world, one would like to have its leader in a position where he could concentrate on issues of global importance rather than have to deal with domestic and personal problems.''
Both analysts said that the weakness in U.S. stocks since July could be viewed as a long-term positive.
International Herald Tribune, September 11, 1998 |
