Global stock prices tumble on fears of US rates rise

World stock prices have fallen sharply as investors took fright at the possibility the Federal Reserve would raise interest rates soon.

The Dow Jones Industrial Average of 30 leading stocks closed 147.98 points lower at 8,916.64 last night. Bond prices fell sharply and the yield on the benchmark 30-year Treasury bond moved back above 6 per cent for the first time since March 6th.

European markets fell more sharply, responding to the US, and also to concerns that a recovery in European economic activity could mean interest rate rises in the near term in Germany and France.

In the UK, the blue chip FTSE 100 index fell 141.5 points to 5,722.4, its lowest level since early March and its biggest one day fall since December 19th in points terms.

The reaction on the Irish market was more muted but the ISEQ Overall Index still closed down nearly 1.5 per cent on the day. The main stocks to lose ground were the financials with AIB 19p lower on 950p while Bank of Ireland also lost 20p to £14.50. Irish Life suffered most among the financials, with a 27p fall to 670p,while Irish Permanent lost 5p to 965p.

The Italian stock market fell by 6 per cent, the Netherlands lost 5 per cent of its market value, and most of the other European markets fell by between 2 and 3 per cent.

The fall on Wall Street was prompted by fears that the continuing buoyant demand in the US economy might force the central bank to raise short-term interest rates for the first time in more than a year.

The Fed had no comment yesterday on a report in the Wall Street Journal that its policy-setting open market committee had shifted its stance last month to a bias towards tightening policy from its previous neutral position.

As the Asian crisis seems to have had little effect on the economy in the last few months, Fed officials have shifted their focus back on to the strength of domestic demand.

Last week Mr Roger Ferguson, a member of the Fed's board of governors, said if the Asian effect did not slow the economy the Fed might have to act itself. The strength of the US economy was underlined yesterday with a report that existing home sales surged by 2.5 per cent last month to a record annual rate of 4.89 million sales.

The Fed's policy-making open market committee will meet again on May 19th to review policy, and a growing number of economists forecast the central bank will vote to raise interest rates at either that meeting or within the next few months.

However, Mr Robert Rubin, the Treasury Secretary, yesterday forecast further falls in inflation and further declines in long-term interest rates.

"The problems in Asia will most likely result in lower inflation in this country and lower interest rates," he told reporters.

In Europe, the markets that gained the most in recent months fell the furthest.

But Mr George Hodgson, European strategist at ABN Amro, said: "I think there's more life yet in the bull market."

The European bond markets drifted lower last week on growing fears that interest rates are unlikely to go much lower among the core European economies, although there is still room for further downward convergence in Spain and Italy.