US reaction crucial for Irish markets as Hong Kong and Japan remain jittery

The uncertainty which hit the world markets last week and saw Irish stocks drop £1 billion in value before clawing most of that value back again by Friday, is set to continue this week.

The Dublin stock exchange, in common with most of its European counterparts, rallied on Friday in the wake of strong gains on Wall Street, but was closed before the US market ran out of steam and slipped back to end with the Dow Jones index just 20 points up on its opening value.

Further slippage is expected in Asia this week but developments on the US exchange will be the key factor for Irish values. One of the key markers this week is the US retail sales figures, which are due out on Thursday.

The sharp fall in the Dow over the past three weeks is due to worries over company profits and the impact of the ailing Japanese economy. The rally on Friday was based on the US employment report for July, which calmed fears of wage inflation. However, the market slipped later as the technical damage caused by the recent falls and worries over Asia took their toll, erasing much of the earlier gain.

Analysts are saying that this will prove to be another bad week for Hong Kong. It found itself on the front line of the Asian crisis last week when markets slumped on growing doubts that China's newest city can stomach the pain that goes with supporting its pegged currency.

Speculators spent billions of dollars shorting the Hong Kong currency, sending the Hang Seng index into a tailspin and prompting fighting words from chief executive Mr Tung Chee-hwa.

"We are totally able and determined to keep the linked exchange rate system," Mr Tung said. "People who think we will budge from this line are wrong." But analysts at the weekend said Hong Kong was in for a drubbing, despite Mr Tung's valiant remarks.

Battered Hong Kong stocks will be vulnerable to further losses this week and brokers are reluctant to predict when prices may see some support.

The blue chip Hang Seng Index lost 11.6 per cent, or 917.79 points, last week to close at 7,018.41 points on Friday, as the Hong Kong dollar came in for a third day of heavy selling.

At one point on Friday the index fell to 7,000 - its lowest level since January 24th, 1995. It was exactly one year after it peaked at 16,820.31 on August 7th, 1997.

Speculation that the Chinese would devalue at the weekend proved to be unfounded. Chinese President Jiang Zemin yesterday again told the visiting Japanese foreign minister that Beijing was determined to avoid devaluing its yuan currency despite a slowing economy, a Japanese official said.

Mr Jiang told foreign minister Mr Masahiko Komura that Beijing would continue efforts to keep its currency stable, despite the financial crisis that had spread from Southeast Asia across the region, the official said.

The Chinese president requested that the new government of Prime Minister Keizo Obuchi "stabilise Japan's financial markets to contribute to the solution" of Asia's crisis, the Tokyo official said.

Mr Komura and his Chinese counterpart, Mr Tang Jiaxuan, agreed to hold vice minister-level talks on the economic situation in East Asia at an early date.

In a meeting on Saturday, Mr Tang dismissed concern over any possible devaluation of the Chinese currency, which could set off another round of destructive devaluations in a jittery Asia.

China's leaders have repeatedly called on Japan to halt the slide in the yen and stimulate its economy to help its Asian neighbours export their way out of the financial turmoil.

Meanwhile Israeli stock prices took off yesterday after the central bank cut its key lending rate by 1.5 percentage points, with shares soaring nearly 6 per cent in their biggest one-day gain in 18 months. The Bank of Israel announced on Thursday that it was cutting its discount rate by 1.5 percentage points to 9.5 per cent as part of an effort to counter an economic slowdown which has taken the unemployment rate to a five-year high. The cut took effect on Sunday, which was also the Tel Aviv market's first trading day since the central bank announcement.