Nervous investors send stock prices even lower

Further sell-offs by panicking investors and fears of a major set back to the global economy from failing Japanese banks sent stocks spiralling downwards on Wall Street yesterday. In Europe, stock markets struggled to contain losses. The Dow Jones industrial average fell further into the bear territory it entered on Monday, dropping below the key 10,000 level to its lowest point since March 1999.

While the technology-heavy Nasdaq Composite Index also fell again, the focus was on the blue-chip Dow, which was hit by rumours about the possible collapse of major Japanese banks, promoting a heavy sell-off in financial stocks.

The market was also hit by the worsening news from Europe about the economic consequences of foot-and-mouth disease and a growing conviction that the Federal Reserve will drop interest rates next week by no more than half a percentage point, less than many investors want to re-boost the economy and share prices

In Europe, markets unnerved by a lengthy list of US profit warnings and talk of more to come, particularly in Europe, were hammered by the Japanese rumours. Speculation that a hedge fund was liquidating its assets added to the panicky mood, which at one point saw the pan-European FTSE Eurotop 300 drop more than 4 per cent to reach October 1999 lows.

Winners were few and far between even after markets had bounced off the worst lows, only six of the DJ Stoxx 50 blue chip index managed to gain ground.

All of Europe's major indices felt the pain with Germany's DAX off 3 per cent, Britain's FTSE 100 down 1.7 per cent and France's CAC-40 1.4 per cent lower. Trading was briefly suspended at Euronext in Amsterdam because of the severity of the slide.

In the US, markets were concerned that several American banks would suffer major losses in any banking collapse. The Bank of America has $9.1 billion of exposure in Japanese banks, Citibank $7 billion and JP Morgan Chase $10 billion. Worries about Japanese institutions have been increased by the fall in the value of stocks, which many Japanese banks hold as assets.

The alarm bells were sounded when international rating agency Fitch said yesterday it had placed individual ratings of 19 Japanese banks under negative review.

The sell-off depressed the Dow to levels not seen since March 1999 and held the Nasdaq to well below the 2,000 mark, a level it fell to on Monday for the first time since mid-December 1998.

The Dow fell 318.76 points or 3.11 per cent to close at 9,972.04 while the Nasdaq slipped 42.67, 2.12 per cent, finishing at 1,972.11. A series of events, from the ominous news from Japan and Europe to the latest warnings from high technology companies, have combined to produce one of the US stock market's worst across-the-board declines in recent years.

Selling increased in tempo during the day as investors received margin calls, demands that investors who bought stock with borrowed funds come up with additional cash or sell shares. The Standard & Poor's index of the 500 most popular stocks succumbed to official bear market territory on Monday for the first time since 1989 and yesterday continued to decline by over 5 per cent.

"The reason the Dow is under pressure is there is a fear that companies that have been immune to the Nasdaq fallout are now going to be subject to the selling pressure," said Mr Edward Riley, chief investment strategist at State Street Global Advisors.

US President George W. Bush expressed concern yesterday over the recent sharp drop in stock prices, but said he had "great faith" in the economy.

In a sign that businesses are struggling to adjust to slowing demand, stockpiles of products rose faster than expected in January, according to a government report. Business inventories rose 0.4 per cent in January to $1,225 billion after an unchanged reading in December, the Commerce Department said. Compared with a year ago, inventories rose 5.8 per cent in January.