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FOCUS-European shares shaken by Hong Kong plunge
Reuters Story - October 23, 1997 04:38
%GB %DE %FR %STX %FRX %US %ECI %NEWS HSBA.L STAN.L CW.L V%REUTER P%RTR
(Updates with European close)
By Nick Louth
LONDON, Oct 23 (Reuters) - A ten percent plunge in Hong Kong
shares sent a ripple of fear around the world on Thursday,
sweeping European bourses three to four percent lower and
washing up against the ramparts of Wall Street.
In Hong Kong, shares recorded their worst ever losses,
measured in points, on a leap in local interest rates and fears
of a run on the Hong Kong dollar.
U.S. shares started with heavy markdowns but there was
little real selling, which helped European markets to stabilise
by the close.
"I'm strapped in my chair and I've got my hard hat on,"
said Arnie Owen, managing director of capital markets at
Cruttenden Roth in the U.S.. "But I'm not panicking yet, not
until there's some real, real selling."
London's FTSE ended 3.06 percent down, France's CAC lost
3.42 percent and Germany's electronic IBIS DAX index slid 3.6
percent, with Germany particularly concerned by a strengthening
mark as the dollar slipped.
Other European bourses mirrored the declines, although
mark-downs of prices prevailed over actual selling in most
markets.
News that the Bundesbank was keeping the repo rate steady
at 3.30 percent for the next two repurchases of securities was
effectively ignored.
U.S. shares were supported by a powerful undercurrent as
switching into dollar-denominated assets from Asian centres
pushed U.S. treasuries higher. The U.S. long bond was a full
point up, yielding 6.34 percent. This was below best levels as
dealers reported foreign central banks selling treasury bills to
raise cash, possibly preparing to defend currencies.
The Dow Jones Industrial Average was around two percent
lower at the European close, with the index having dipped as low
as 7824. Unless prices rise above 8000 by the close, NYSE will
join London and Frankfurt in breaking down through important
psychological support levels.
"This is emotional and an overreaction. It's not based on
economic fundamentals," Daiwa chief strategist Roger Monson said
of the sharp drop in the FTSE 100.
"(The slide) is not something that can really be based on a real
analytical argument, but there's a fear that what happened in
the Hong Kong market might happen in the German market," said
Wieland Staud, chief German equities strategist at Yamaichi in
Frankfurt.
Hong Kong's Hang Seng Index closed down 10.41 percent,
its biggest ever points loss at 1,211.47, eclipsing the 1987
crash fall of 1,120.
"No one could predict this. It's pretty drastic," said Howard
Gorges, director of South China Brokerage.
"The Hong Kong issue will not go away and it's hard to see
the Hong Kong market fighting back," said NatWest strategist Bob
Semple.
However, in percentage terms Thursday's fall comes nowhere
near 1987's 33 percent. The Hang Seng was almost 16 percent down
at one point on Thursday, but recovered to close above the
crucial 10,000 support point.
Stephen Lewis, chief economist at London Bond Broking, said
the knock-on effect of Hong Kong weakness could be substantial
on U.S. bonds.
"It will be a factor inhibiting the Fed from raising
interest rates in response to U.S. domestic factors and, as a
result, bonds will probably do quite well," he said. Asia's
problems, combined with Wednesday's rise in U.S. treasuries,
boosted German bunds and British gilts.
Hong Kong chief executive Tung Chee-hwa said in London that
the Hong Kong government was determined to hold the exchange
rate to the dollar.
Overnight rates soared to 250-280 percent on Thursday from
six percent on Wednesday morning.
The HK dollar has been pegged at HK$7.78 to $1 since 1983 and
is allowed to float in a narrow band. By 1530 GMT it stood at
$7.7275, above the worst of $7.7495.
Tumbling asset markets in Asia also took their toll on the
yen, which made a weak start in Europe. The dollar was hovering
around key resistance at 121.50 as European markets closed.
"The impact on dollar/yen so far has been modest and likely
will be until we see something like a breakdown in the Hong Kong
dollar," said Keith Edmonds, chief analyst at IBJ International.
Hong Kong's sell-off dragged down most of Asia. Singapore
and Malaysian shares also fell heavily and Tokyo's Nikkei index
ended with losses of 3.03 percent.
European stocks with a big exposure to Hong Kong's markets,
like banks HSBC and Standard Chartered and
telecommunications company Cable and Wireless were among
London's worst hit stocks.
German shares, which have been among Europe's best
performers this year, fell hard, moving through the
psychologically-important 4,000 point. Its fall dragged markets
like Amsterdam with it.
"A crash like that (in Hong Kong), while perhaps not having a
direct impact here, is certainly pressuring on sentiment and
will certainly hurt feeling in the financial sector as well,"
one trader said.
French dealers predicted a wider impact in Europe.
"The Asian crisis is a lot worse than everyone thought and
it is going to affect a lot of countries, Germany because of its
exports, Britain and, to a lesser extent, France," one trader
said.
CURRENCIES AT 1530 GMT
The dollar was nearly a pfennig weaker, quoted at 1.7715
marks and 121.62 yen, compared with 1.7834 and 120.70 in late
European trade on Wednesday.
STOCK MARKETS AT 1530 GMT
LONDON - The FTSE 100 index closed down 157.3 points, or
3.06 percent, at 4,991.5.
FRANKFURT - The IBIS DAX index of computerised trade ended
down 148.48, or 3.60 percent lower, at 3976.38
PARIS - The CAC-40 index closed down 101.19 points, or 3.42
percent, at 2,856.87 points.
PRECIOUS METALS
Gold lost early strength which was spurred by worried Asian
investors. By 1530 GMT it was trading at $323.50, two dollars
below its peak, and just a dollar above the London close on
Wednesday. Silver was weaker at $4.97 from $5.07.
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