The spectre of higher interest rates stalked equity markets yesterday, leaving recently high-flying European bourses nursing heavy losses and Wall Street sharply lower.
With Y2K worries apparently out of the way, investors fear the US Federal Reserve and European central banks may be less reticent about tightening monetary policy.
The bearish mood in US equities markets spread over to the high-flying technology sector, as indices fell across the board.
On Wall Street, the downward momentum accelerated after midday. By last night's close the Dow Jones Industrial Average was down 360 points at 10,997. The more broadly based Nasdaq index, which includes the main technology companies, shed 230 points to close at 3,901.20.
A fear of higher interest rates drove much of the selling, with financial shares among the hardest hit on the day when President Bill Clinton re-nominated Alan Greenspan as chairman of the Federal Reserve Board.
Economic data, such as Monday's manufacturing report and yesterday's construction figures, were already having a disproportionately worrying effect, as the market focuses on Friday's key employment numbers and what impact they may have on the Fed's next rate decision on February 2nd.
European investors' discomfort was exacerbated by a profits warning from Baan, the Dutch business software company, which swiftly wiped almost 32 per cent off the company's share price.
The news prompted a rapid reassessment of other leading high-tech favourites, such as Nokia in Helsinki, SAP in Germany and Cap Gemini in France, all of which saw sharp losses in their share prices.
Helsinki's benchmark Hex general index took a hefty hit, losing 7.5 per cent, its biggest one day loss since October 1998.
Amsterdam's AEX index fell 4.9 per cent, its largest single session pullback for a year, while a 4.2 per cent tumble for the CAC index in Paris was the market's biggest one-day drop for 15 months.
Frankfurt contained its loss to 2.4 per cent on the Xetra Dax index but in London, the FTSE 100 index retreated 264.3, or 3.8 per cent, the biggest-ever single day points fall in the index. In percentage terms, however, the decline was only the eighth worst. The extent of the slide took some dealers by surprise while others took the view that London would rally after the sell-off, once the expected bids and mergers appear.
But Mr Richard Jeffrey, group economist at CCF Charterhouse, said: "The market is confronting the reality of rising interest rates. The same is dawning in the US. On the domestic front there is evidence to confirm the strength of consumer spending."
Other continental European markets registering hefty losses included Brussels, Copenhagen and Zurich, which all lost 4 per cent while Oslo and Madrid suffered losses of more than 3 per cent.
Many analysts also expect the Bank of England's monetary policy committee will raise interest rates when it meets next week and that European interest rates will rise in the first half of the year.
