Clinton crisis and profit warnings create volatile day on markets

Profit warnings, concerns about the progress of Japanese banking reform and fears about the effects of President Clinton's video testimony combined to set off another volatile day on world stock markets, prompting investors to favour bonds over equities.

By late yesterday some stability returned to the US market, but investors will now be nervously waiting for news of public reaction to the release of the videos.

Bond yields fell to their lowest levels for decades in Germany, the US and the UK, as investors sought the safety of developed government bonds. The yield on the benchmark 30-year US Treasury bond dropped to 5.08 per cent in early trading, while in Germany, the yield on the 10-year bund hit a new post-war low of 3.85 per cent.

In Dublin, the yield, or interest rate, on 10 year Government bonds fell to 4.26 per cent, from 4.35 per cent on Friday. This fall in long-term interest rates will underpin the decline in fixed interest rates being offered to borrowers for terms of three years and longer. A number of institutions - including the EBS and Irish Permanent - have already reduced these interest rates and the fall in long-term interest rates on the market means that more are now likely to follow.

The equity sell-off started in Asia, with the Nikkei 225 average falling 2.8 per cent to 13,597.30, its lowest for 12 years, after an agreement with opposition parties about a rescue plan for the Long-Term Credit Bank of Japan.

European stock markets were lower from the start and were hit during the day by profit warnings at EMI, the UK music company, and Philips, the Dutch electronics group. The warnings, which came on top of similar statements last week from Alcatel, the French telecoms group, and Royal Dutch/Shell, the oil giant, reinforced fears that European corporate profits were coming under pressure from the slowdown in emerging markets. The CAC 40 share index in Paris fell 3.5 per cent and the DAX in Frankfurt 4 per cent, while the Amsterdam stock market fell 5.9 per cent. In London, the FTSE 100 index fell 65.3 to 4,990.3, while in Dublin the ISEQ index lost almost 1.6 per cent in value.

On Wall Street, with many traders away for the Jewish New Year holiday, the Dow Jones Industrial Average opened down 175 points. By lunchtime, with little new emerging in the Clinton testimony, the market had recovered some poise, and was 93.98 lower at 7,801.68. It later moved into positive territory on the day, to close up 37.59 at 7,933.25

Latin American markets continued to be nervous in early trading, although Mr Pedro Malan, the Brazilian Finance Minister, said the government would not impose restrictions on capital outflows or devalue the real.