Dow Jones plummets 171 points as hopes of interest rate cuts disappear

EUROPEAN share and bond markets are set for a very nervous opening next week after a sharp sell-off of US shares. The Dow Jones Index tumbled 171.24 points yesterday, after news of a surprisingly sharp rise in job numbers appeared to dash hopes for lower interest rates.

The decline - which brought the index to 5470.45 - was the third biggest points loss ever in the Dow Jones Industrial Index, behind Black Monday in 1987 and the mini-crash of 1989.

Because the value of the index has itself been rising over time, in percentage terms the fall was not as dramatic. However, it still added up to a very sharp drop of over 3 per cent in share values, which is sure to knock sentiment when European markets open next week.

The US Government bond market suffered an even sharper decline, another factor likely to depress markets next week. The yield, or interest rate, on the benchmark US 30-year bond rose from 6.46 per cent to 6.71 per cent, the biggest one-day rise in long-term interest rates since news of the Iraqi invasion of Kuwait broke in 1990.

Selling in stocks and bonds was sparked by the US government's report that employment grew 705,000 last month, far exceeding forecasts for growth of 326,000. The US President, Mr Clinton, said he was "very proud" of the economy's" job-creation performance.

But the market took a different view as the news of a much more robust than expected economic performance sharply dampened optimism of a further reduction in interest rates. Hopes of lower rates has recently been pushing higher on both sides of the Atlantic.

The bulk of the fall in the US came too late to be fully reflected in European markets. However, early declines on Wall Street did reverse an early rally in Dublin. The ISEQ Overall index closed down 21 points on 2376. Most of the fall on the Irish market was due to sharp reverses by three stocks which make up almost 40 per cent of the value of the market: AIB, Bank of Ireland and CRH, all of which closed well down on the day.

The Dublin bond market also suffered with the 10-year price had fallen by more than a point to 99.90" to yield 7.85 per cent. It stood at 101.30 to yield 7.66 at the close on Thursday. The five-year bond fell to 102.90 from 103.95 to yield 7.09 per cent from 6.84 per cent.

The London market closed sharply weaker but well above the day's low point of 3685, but the FTSE-100 still closed down 48, points on 3710, the biggest one-day fall since October last year.

However, Wall Street's performance will lead to a reassessment in European markets on Monday morning and a nervous wait for the US opening at lunchtime.

"The reality principle came to Wall Street. The Fed is not going to cease again," said Mr Michael Metz Oppenheimer & Company's chief investment strategist, referring to the Federal Reserve, the nation's central bank.

Last night, US analysts were forecasting that further sharp drops in the index are on the way.

The 171-point drop was the biggest drop in the 30-share Dow since October 13th, 1989, when the index fell 190.58 points or 6.91 per cent. But the Dow's percentage loss of 3.04 percent paled in comparison with the record 22.61 per cent plunge on the October 19th, 1987 crash.

Declining issues trounced gainers by 2,653 to 167 on volume of 544.7 million shares - the New York Stock Exchange's fourth-heaviest session ever.

Many on Wall Street were stunned. "There was frantic panic selling as all investors ran for the aisle at the same time," said Mr Philip Orlando, chief investment officer at Value Line Asset Management.

The Dow Jones had a yo-yo day, falling by over 100 points in early trading, before recovering to around, 70 points lower. However in late trading, after European markets had closed, it dropped by as much as 200' points at one stage before ending down by just over 171 points.

Sparking it all was the report from the US Labour Department showing a net rise of 705,000 non-farm jobs in February, the biggest single monthly gain in 13 years.

The overall unemployment rate fell to 5.5 per cent.

The jobs report in effect torpedoed the notion popular with many analysts over recent weeks that the expansion in the US economy had run its course and that a period of recession might even have been in prospect.

It was that scenario that had kept hopes alive that the Federal Reserve, might have made one more cut in interest rates at its next policy meeting on 26th March.

By contrast, an unemployment rate of 5.5 per cent is likely now to stir renewed fears of a return of inflationary pressures in the US. (Additional reporting from Reuter, London Independent Service)