Global markets follow US stock slide

FRIDAY’s crash of the US stock markets, with their tremendous power of gravity, triggered an avalanche of selling yesterday in other markets around the world.

But top Thai policymakers assured jittery investors that the recordbreaking dive in the Dow Jones Industrial Average and the Nasdaq composite index at the end of last week represent a shortterm correction.

“What happened in the United States is supposed to be a correction,” said Finance Minister Tarrin Nimmanahaeminda while attending the World Bank and International Monetary Fund spring meeting in Washington, DC.

He added: “If the trend doesn’t continue, it won’t have much of an impact on Asian stock markets.”

The Dow Jones Industrial Average plummeted a record 616 points, almost 6 per cent, to close at 10,305.77 on Friday and the Nasdaq composite index fell a record 355 points, almost 10 per cent, to settle at 3,205.70, on fears of higher inflation and further interest rate rises.

This followed the release of the latest figures on the US government’s main inflation barometer, the consumer price index, which leaped 0.7 per cent in March. At the same time, the core inflation rate also rose 0.4 per cent, the biggest jump in more than five years.

Although the Nasdaq composite index has lost 27.2 per cent since March 10, it is still up 45.8 per cent from a year ago.

The big sell offs in the US drove Thai stocks down by more than 5.20 per cent to 392.88. Other Asian markets also all suffered from the harsh beating. The Nikkei index shed 6.98 per cent, the Hang Seng 8.55 per cent, the Seoul composite index 11.63 per cent, the Singapore market 8.69 per cent, the Philippines 4.38 per cent, Malaysia 6.04 per cent and Indonesia 4.94 per cent.

Dr Prasarn Trairatvorakul, secretary-general of the Securities and Exchange Commission, said: “We’ve been keeping a close watch on US markets. The Dow Jones has not risen as significantly as the Nasdaq. So when the Nasdaq falls, it’s not a big surprise because people have already been saying all along that the sharp price rise of high-tech stocks is outrageous.”

Prasarn added that it remains to be seen whether the abrupt fall in US stocks is a short-term correction. “We don’t know whether it’s a short-term correction because the New Economy stocks are something that we’ve never had any experience with,” he added.

However, part of the plunge in Thai and Asian stock markets was due to asset reallocation on the part of fund and money managers, who were technically obliged to sell emerging market shares to offset the loss in value of US stocks in their portfolios, Prasarn said.

“The Thai market has not risen appreciably during the recent past, so it’s not likely to fall sharply either. Besides, Thai stocks aren’t considered New Economy stocks,” Prasarn said.

“We’ve expected (the market fall) to happen. It’s not much of a surprise,” he added.

The tumble in the US stock markets has raised wide concern over whether the US economy is in for deep trouble. Any precipitous slowdown in the US economy would have a major impact on the recovery of Asian countries, which depend on the US market for their exports.

On Saturday, President Bill Clinton came out to soothe investors’ fears over the meltdown of US stock markets. “I think everybody who invests his money should tend to look at what it’s likely to look like over a year,” Clinton said. “So all I can do is try to keep the economy strong and that’s what I’ll do.

“I think the investment climate and the markets will take care of themselves,” Clinton added. “They’ll go up, they’ll go down, but I think the long-term trends are quite positive.”

Speaking at his testimony to members of the Senate banking committee last Friday, Alan Greenspan, US Federal Reserve Bank chairman, said investors who dumped stocks had been worried over future corporate earnings rather than over fears of his recent comments about the inflationary effect of stock fuelled spending.

“The Nasdaq values are being driven, as indeed they should, by very substantial views about what earnings should be,” he said. “These types of stocks, these types of companies are at the cutting edge of technology where there is a great deal of turbulence. That in itself is a reason why you would expect a high degree of stock volatility.”

The Fed’s open market committee will meet next month, and analysts expect its members to raise the overnight bank lending rate by a quarter of a percentage point to 6.25 per cent. That would be the sixth increase since June.

Greenspan defended the need to raise rates to head off inflationary imbalances, which threaten to affect the US economic expansion, now in its 10th year.

The Fed chairman has argued that rising wealth, boosted by stock gains, is leading to more demand than the US economy can supply. That imbalance could lead to inflation soon, if the Fed does not raise rates more, he said.

“The crucial issue is that we perceive that the markets are working in the appropriate direction,” he said. “Had we kept rates where they were, we could only have done that by increasing liquidity at an exceptional rate and in my judgment an inflationary rate.”

Abby Joseph Cohen, chief investment strategist at Goldman Sachs, said: “We think the longstanding economic expansion in the US is still far from over and that profits will go up and that stocks will rise from current levels.”

She said the market nosedive on Friday was “a market event rather than an economic event. As we look at our expectations for earnings, economic growth and so on, nothing has changed during the past two weeks”.

In the next two weeks, “investors will be looking for some signs that might provide comfort. We think that there’ll be some good information in the corporate profit reports”, she said.

“Our holding in equity positions is 65 per cent, and that’s hardly a negative comment.

“We’ve suggested significant equity positions because we thought the market was dramatically undervalued. By the end of March, we thought it was priced just about where it should be.

“Over the next several months, we’ll be looking at profits. Will profits disappoint relative to our expectations? We don’t think so. Will inflation be dramatically higher? Again, we don’t think so.

“The bottom line for us is that the Federal Reserve will raise interest rates, step-by-step as necessary, and in a very gradual manner. We think that is already factored into equity markets.”

Mark Mobius, managing director and fund manager for Templeton Franklin Investment Services (Asia) Ltd, said he is surprised by the depth of the market losses over the past few days.

“I had no idea this thing could be so bad,” said Mobius. “I’ve got a feeling it probably won’t be as bad as ’87 [when global markets crashed].” US Treasury secretary Lawrence Summers told Fox News on Sunday: “The economy of the United States is in better shape than it has been in a long time.

“We always watch all the figures. We always worry about inflation because being vigilant about inflation is how we kept inflation under control over all these years.”