Wall Street's negative reaction to the Federal Reserve's half-point cut in US interest rates sent share prices across Europe sharply lower yesterday. Even though technology shares on Nasdaq recovered some ground after a weak start, European technology shares were sharply weaker with mobile phone stocks such as Nokia and Ericsson down more than 5 per cent.
The markets were also depressed by the latest German Ifo index, which showed German business confidence at its lowest level since July 1999. This figure is likely to increase pressure on the European Central Bank to cut interest rates to boost ailing EU economies.
European investors had been looking to the Fed for a three-quarter point cut in interest rates and the Fed's caution led to a flood of early selling. Technology and telecom stocks suffered the brunt of the negative sentiment, with specialist technology markets such as London's Techmark and Frankfurt's Neuer Markt both falling 3.5 per cent.
In London, the FTSE 100 index of leading stocks initially slumped below the 5,500 mark before recovering to close 1.8 per cent lower.
"The market had rather worked itself up into a frenzy of expectation for more," said NatWest Stockbrokers equity strategist Mr Jeremy Batstone. But the Fed "had to tread a difficult line between not appearing to pander to the wishes of the financial markets and yet at the same time trying to prop up consumer confidence which is of course in the United States very closely correlated with the stock market," he said.
Credit Suisse First Boston strategist Mr Richard Kersley said there was still value in the market. "It's a dangerous game to be overly bearish about the market at these levels," he said. "The Fed is really standing by to cut rates as is necessary and it's quite likely you could have a rate cut before the next meeting" in two months.
There are already tentative signs of improvement in the United States, mainly in old economy stocks, and leading indicators would probably pick up in the second quarter, he added.
Other analysts warned that world stock markets may not have turned the corner yet.
"The market is currently pricing in a fairly robust rebound by the end of the year," Mr Batstone said. "That is too optimistic. The question remains as to whether the corporate sector's profitability can recover even if economic activity eventually turns around."
The Irish market - one of Europe's best performers this year - was marked down heavily, with most of the leading stocks losing ground. Irish technology stocks on overseas markets were also sharply lower and software group Parthus suffered the indignity of falling below last year's flotation price.
Dealers in Dublin see little short-term improvement in Irish stocks although the flow of corporate earnings has presented few unpleasant surprises.
