Share prices opened lower on the Tokyo Stock Exchange early today with the key Nikkei average dropping 1.1 per cent. In Sydney, Australian shares opened sharply lower, with the All Ordinaries Index tumbling 2.74 per cent. - (AFP, Reuter).
Share prices are expected to open significantly lower on international markets today in the wake of Friday's sharp falls in London, New York and Dublin. Dealers are set for a turbulent week on equity and currency markets as two of the world's most powerful central banks meet to decide their interest-rate policy.
The question now is whether Friday's fall in share prices was a "correction" after the strong bull run in recent months or the start of a market crash.
The share sell-off in London on Friday, which wiped almost £22 billion off shares values, was that market's second-biggest fall since October 1987.
In New York the Dow Jones index closed 3 per cent lower while in Dublin, where £400 million was wiped off share values, the ISEQ index closed 50 points lower at 3,655.97. The big four shares - Bank of Ireland, AIB, CRH and Smurfit - suffered most.
The fall in US share prices appears to have been triggered by a fall in the dollar against the deutschmark. The dollar fell almost three pfennigs to DM1.818 as investors started to bet on an increase in German interest rates by selling dollars to buy D-marks.
Dealers said there was a shift in sentiment about upward movements in German interest rates which prompted dollar selling by hedge funds. Fears that an interest-rate rise in Germany was imminent prompted investors to take profits on shares which have risen strongly in recent months.
The Bundesbank will meet on Thursday, and many investors expect it to raise interest rates to protect the D-mark and stifle inflationary pressures in the German economy. An increase in German interest rates and a revival of the D-mark would put pressure on other European currencies and could spark interest rate increases elsewhere.
Low interest rates and low inflation have driven stock markets strongly ahead in recent months by encouraging investors to move away from cash and into shares, but the speed and strength of the bull run have made many investors nervous.
There has been growing anticipation that a correction is in sight. On Friday investors moved to take profits after the markets' record-breaking bull run. Many market sources feel the latest volatility will be more of a correction than a crash on the scale of Black Monday on October 19th, 1987, when the Dow lost over 20 per cent of its value in one day.
Friday's falls in New York and London must be placed in the context of the strong bull runs on international stock markets in recent months. The bull runs - heavy share-buying - have driven the Dow Jones over the 8,000point level and the FTSE in London over 5,000 points this summer.
The Dow Jones reached an all-time high of 8,254.89 in the last week of July, giving a 28 per cent rise in share values since the beginning of the year and rising from a level of 7,000 points in just five months. In London share prices have risen by 27 per cent over the past year.
Dealers in London have suggested the situation is very different from that of October 1987. This has been a year of corporate share buy-backs as opposed to the new share issues of 1987, and the corporate sector has had a series of profit downgrades throughout the year, reflecting rising interest rates and a stronger sterling.
Investors are sitting on a 27 per cent rise in share prices over the past year and interest rates look close to their peak, so the interest rate environment is becoming more benign.
However, volatility is expected to be the key feature on equity and currency markets in the coming weeks. Interest rates will be the focus of attention this week with both the Federal Open Market Committee in the US and the Bundesbank holding monetary policy committee meetings.
Against a background of benign economic data in the US, the Federal Open Market Committee is unlikely to take any action on interest rates tomorrow. The market is focused on the Bundesbank meeting on Thursday.