Volatile trading on world equity and currency markets is expected this week as investors and dealers assess the likely impact of the US interest rate cut on consumer confidence and economic growth.
Most analysts expect that last week's half-point interest rate reduction by the Federal Reserve Bank will not be enough to allay concerns about the US economy.
Financial markets will look for signals from the Fed, the European Central Bank and the Bank of England monetary policy committee on the outlook for interest rates. In addition a raft of economic statistics due in the US this week will be monitored for indications on the rate at which economic growth is slowing. A number of speeches due from Federal Reserve Bank regional presidents will be listened to closely by the markets. Speeches by presidents from Atlanta, Dallas, and Philadelphia will be monitored carefully for any indications on what will happen at the Federal Open Market Committee meeting scheduled for the end of this month. US consumer credit numbers and speeches by Fed regional presidents in Texas and Atlanta on Monday will be followed by European retail sales, German unemployment figures and the Richmond Fed Survey in the US on Tuesday. Later in the week US jobless, inflation and retail sales figures and the outcome of the UK Monetary Policy Committee meeting have the potential to further unsettle nervous equity markets.
Analysts said the initial euphoric reaction to the surprise US rate cut by the Fed was overdone. Share prices shot up on Wednesday on US markets when the Fed cut its key rate to 6 per cent. The technology-heavy Nasdaq Index rose by 14 per cent. European markets responded with strong rises on Thursday. In London the FTSE 100 closed up 2.4 per cent despite signs of a slippage in the US when trading opened. While the US rate cut initially boosted equity markets, it was quickly followed by more bad news on the US economy. Figures from the National Association of Purchasing Managers indicated a sharp slowing in service sector growth and corporate job losses and take-up of unemployment benefit figures showed strong increases. Market sentiment was not helped by comment from the International Monetary Fund that it intended to reduce "meaningfully" its forecast for global growth. And already tense equity markets were further unnerved on Friday by the suspension of Bank of America amid rumours that it had incurred large losses on derivative trading. By the end of the week shares were sliding again, and poor job figures lead to renewed concern about the US economy and world growth. On Friday the Nasdaq index dropped just over 6 per cent while the Dow Jones Index fell by 2.25 per cent.
Market expectations that the US interest rate cut would be quickly followed by rate reductions by the European Central Bank and by the Bank of England may be over optimistic.
Last Thursday the ECB left its key interest rate unchanged at 4.75 per cent.
