Markets set to weaken in wake of Wall Street

SHARE prices n Dublin and London are expected to weaken when the trading starts this morning after yesterday's 88 point decline on Wall Street.

US stock prices plummeted at the start of trading yesterday morning as recent economic data pointing to a strengthening economy triggered a sell off in bond prices that spilled into equities markets. The New York market managed to regain some ground in late trading. The Dublin and London markets remained closed for the Easter holiday.

The Dow Jones industrial average was down 106.94 points at 5,575.94 at mid morning, after falling as much as 112 earlier. The sell off set off circuit breakers that restrict trading in stock market index contracts.

The Dow Jones industrial index closed at 5594.37, down 88.51 points (1.56 per cent) on the day.

Anxiety had grown on Wall Street after Friday's stronger than expected March jobs report sparked heavy selling in the Treasuries market.

The key 30 year Treasury bond fell 18/32, or $5.625 on a $1,000 bond, raising the yield to 6.88 per cent from 6.83 per cent at Friday's close. Key bond prices fell almost two full percentage points during Good Friday's holiday shortened session on fears that interest rates were headed higher.

On Friday, the Commerce Department reported that non farm payrolls rose 140,000, more than double Wall Street's expectations for a rise of just 60,000.

The data came on the heels of last month's Commerce Department report for February, which had stunned the markets with a jump of 705,000. While that figure was revised downward to 624,000 on Friday, it still showed the economy was stronger than analysts had expected for the first quarter.

Analysts believe the Federal Reserve is unlikely to lower interest rates in light of the strengthening economy. The report was strong enough to start talk that the Federal Reserve might instead raise interest rates to cool the economy and hold inflation in check.

"If the economy continues accelerating, then certainly a rate hike, maybe after the election, may be in order. Given the presidential election I think there's a zero chance we'll see a rate increase between now and the first Tuesday of November," said Mr Phil Orlando, chief investment officer of Value Line Asset Management.

However, with Europe farther back in the economic cycle, any impact on this side of the Atlantic will likely be short lived.

"When the February non farm payrolls came out the knock on effect in terms of the European markets was quite small," said Mr Stephen King, international economist at stockbrokers James Capel.

He said this was, first, because the market in Europe felt that Wall Street was overbought relative to other markets and, second, what may be happening to the US economy does not necessarily apply to Europe.

"This looks like a specific US problem, whereas most European economies are slowing down and there are further rate cuts to come," he said.

"You will probably see the U bond market weakness coming through in Europe for a couple of days at least, but I would very much doubt if we see any sort of permanent correction," Mr King said.

Mr Michael LaTronica, market analyst at Gruntal Securities, said he was encouraged because yesterday's sell off was executed primarily by professional traders, not individual investors or mutual funds. "If this were a massive broad based sell off of consequence, you'd see much more volume," he said. "I'm not terribly concerned, in fact, I view this as an opportunity to buy."

Even if US rates are not cut again, those in Europe will almost certainly come down further. The only question mark seems to hang over Britain and there has recently been speculation that the Chancellor of the Exchequer, Mr Kenneth Clark, will keep rates on hold.

However, the more cynical in the market point out that a general election is only a year away at most, and the ruling Conservative party is lagging dramatically in the opinion polls.