A late rally on Wall Street should provide support for European markets next week after European stock markets fell heavily yesterday in response to Thursday's 128-point fall in New York. After falling by as much as 175 points in earlier trading, the Dow Jones Industrial Average recovered most of its lost ground and closed down marginally from Thursday's close, as bargain-hunting by investors took hold. The early weakness in New York lead to heavy losses on international stock markets and in Dublin the market fell by 1.5 per cent with the major financial and industrial shares suffering most from the poor sentiment. In London, the FTSE-100 Index fell by one per cent, while some continental markets suffered savage falls, with the Frankfurt market falling by four per cent before regaining some ground in after-hours trading.
Thursday's loss on Wall Street had been triggered largely by profit-taking, but yesterday's early weakness was more fundamental, with dealers citing the weakness of the dollar and falling bond prices as major factors. Unlike previous days when the New York market has fallen, yesterday's weakness extended to the high technology sector after Merrill Lynch downgraded the high-tech blue-chip Intel.
It was the technology sector that led the recovery after the previous Friday's three per cent fall of the Dow. But yesterday's weakness across the board led to a sharp early fall in the NASDAQ market where most of the high technology shares are listed. As with the broader market, NASDAQ-listed shares also recovered strongly before the close.
Although volatility and 100point daily changes have now become an established pattern for the New York market during August, dealers said the current instability is a reflection of the market trying to establish a base level during a period of low volumes and while currency and bond markets are uneasy. The main picture of good economic growth and low inflation in the US had not changed, said one dealer.
But markets will be watching closely at the actions of the Bundesbank next week, particularly what move the German central bank takes on its key "repo" money market rate next Tuesday.
Speculation of higher German interest rates was one factor putting pressure on sterling on the foreign exchange markets yesterday. The British currency also lost ground due to rising fears about the impact of its recent strength on British exporting industry. The pound rose above 92p sterling at one stage yesterday, before closing at 91.68p, 0.3p higher than the previous evening. Analysts are now becoming more confident that sterling's bull run is petering out, with heavy selling affecting the currency yesterday.
Meanwhile, the deutschmark continued to gain ground on the markets, buoyed by speculation on higher German borrowing rates.
