Fears of US rate rise knock shares

EUROPEAN share prices have fallen sharply, as the markets reacted to the risk of an increase in US interest rates later today. US prices also fell sharply in early trading but recovered later to leave the Dow Jones up 6.28 at 5894.74. However, the broad indices failed to follow the Dow's recovery.

The bond market losses were erased in the afternoon on a report that an unidentified Fed source said that the Fed was set on achieving long term price stability and was close to adopting a core Consumer Price Index target as the basis for monetary policy.

The report reassured Wall Street that the central bank remained vigilant in its inflation fight - good news for stock investors who are afraid that inflation could eat away at their investments.

The key 30 year Treasury bond jumped a quarter point, lowering its yield to 7.02 per cent from 7.04 per cent at Friday's close.

Analysts are expecting that a meeting of the Federal Reserve Board's important policy making committee could decide to sanction a small increase in US rates.

In Dublin the ISEQ index closed 0.3 per cent lower, with the main falls among the industrial stocks. The index closed down 8.09 points at 2590.37.

In London the FTSE 100 index retreated further away from the symbolic 4000 level, ending more than 44 points down at 3919.7.

The balance of the interest rate decision in the US is expected to tilt in favour of higher interest rates. Two thirds of Federal Reserve governors were reported to favour an immediate increase, according to a leaked Fed document.

Shares on Wall Street fell sharply enough in early trading to trigger the New York Stock Exchange's curbs on automated deals.

Within a few minutes of opening the Dow Jones industrials index was more than 50 points down at 5838, although trading volumes were light because of the Yom Kippur holiday. However equity prices recovered sharply in the last hour of trading.

Despite Wall Street's late recovery, the financial markets are becoming concerned that a change in the interest rate environment will trigger the long predicted crash - or "major correction" - on Wall Street.

A growing chorus of analysts have warned that shares are overvalued, even as the Dow Jones index has headed towards the 6000 level.

The Federal Reserve is expected, by a small majority of analysts, to raise rates by at least a quarter point because the US economy has managed to defy predictions that it would slow down in the second half of this year.

The Bank of England's concern about higher inflation in Britain beyond the next few months following the pick up in the pace of economic activity, is shared by many City experts.

Other European stock markets also fell yesterday. In Paris, the CAC-40 share index dropped nearly 12 points to 2067.92. The 30 share DAX index in Frankfurt closed down 19.06 at 2627.04.