Further heavy falls in share prices on global stock markets are in prospect next week after prices on Wall Street collapsed last night following US inflation figures which were far higher than market analysts had expected.
While most of the losses on the markets in recent weeks have been confined to technology stocks, which had risen to unprecedented levels, yesterday's heavy selling on Wall Street extended into the financial and industrial stocks, which make up the Dow Jones and S&P-500 indexes.
At the close of heavy trading on Wall Street, the Dow was down 5.6 per cent, the broader-based S&P-500 index was down 5.8 per cent, while the Nasdaq index of technology shares had plunged almost 10 per cent as investors dumped high-priced technology issues.
Yesterday saw the biggest one-day fall on the Nasdaq and means that one-third of the value of shares listed on the index has been wiped out in the past week.
Leading financial and industrial shares are being sold in anticipation of an increase in US interest rates when the Federal Reserve chairman, Mr Alan Greenspan, convenes his next policy-making committee meeting on May 16th.
Mr Greenspan did not directly address the stock market decline when he spoke at a conference in Washington yesterday, but he did comment on "uncertain" valuations put on many stocks.
Already, an interest rate increase of a quarter of a percentage point by the Fed has been priced into the market. But yesterday's sharp response by the markets to the March inflation figures indicates a belief that the increase may be more aggressive - possibly half a percentage point - as the Fed tries to put a brake on inflationary pressures in the US economy.
Market analysts had been expecting a 0.5 per cent increase in inflation, so the 0.7 per cent rise came as a shock.
"This has nothing to do with moving funds from one sector to another, it's simply the typical market reaction to an awful set of American inflation numbers and the likelihood of a sharp hike in interest rates", said one Dublin fund manager.
A sustained stock market fall could undermine confidence in the US economy, the driving force of international growth. This could have knock-on effects on the Irish economy, which is heavily dependent on global markets and the fortunes of US companies.
Even before New York opened for business yesterday, European stock markets had fallen sharply following the publication of the US inflation figures. The FTSE100 index continued to fall after New York opened and closed 2.8 per cent down on the day.
Worst hit in London was the Irish Internet software company, Baltimore Technology, which was aggressively sold and fell more than 24 per cent to £53.44. Baltimore is now at less than half its price when it was included in the FTSE-100 index four weeks ago.
The pattern was the same on the Nasdaq, where Baltimore shares closed down 33 per cent at just over $74.
The Irish stock market was almost unaffected by the turmoil on overseas markets, but most dealers expect a heavy sell-off on Monday as Dublin catches up on the rest of the world markets.