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U.S.: Stocks Fall And Cause Jitters

Prague, 5 August 1998 (RFE/RL) -- The plunge in prices on the New York Stock Exchange yesterday has sent shock waves around the world and rekindled fears of global economic recession.

The key Dow Jones industrial average fell by almost 300 points -- its third biggest points drop ever. For pessimists, that's sufficient grounds to believe that the Asian financial crisis is at last seriously impacting on the mighty U.S. economy, and that the trouble will continue. They are particularly concerned at the imbalance of trade as Asian goods gain in competitiveness through local currency devaluations.

For optimists, the U.S. drop, though severe, represents only a needed correction in a market which has reached record heights in recent years and has become overvalued. They note that the Dow index is still up more than seven percent this year, that U.S. economic growth is continuing, and that interest rates and inflation remain low.

In any event, Asian and Pacific stock markets reacted badly to yesterday's news from New York, with falls across the board in Hong Kong, Tokyo, Singapore, Seoul, Jakarta, Sydney and elsewhere. James Hom, senior economist with Nikko Securities in Hong Kong, believes the United States will not easily escape the contagion from Asia.

"What happened in the U.S. did not surprise me, in that the Asian crisis will have an affect on the U.S. markets, and I think we are starting to see some of the major corporations in the U.S. feeling the effects in their earnings results of lowered exports to Asia, especially in the capital goods area."

Will vulnerable areas like Latin America, and after that the emerging markets of Europe, be drawn into a circle of instability? Hom says much now depends on the interplay of reactions between the U.S. market and Asia.

He says in addition that Asia's weakened economic giant, Japan, remains a key factor in the equation. If Japan's attempts to revive its economy eventually lead China to devalue its currency, then world recession could be on the horizon.

In Europe, the initial stock market reaction to yesterday's fall on Wall Street was also one of shock. Most markets from London to Moscow were down, with stocks in Germany plunging more than three per cent on opening. However analyst Eckhard Schulte, Senior Economist in Frankfurt with the Industrial Bank of Japan, is guardedly optimistic about prospects for Europe:

"Speaking in fundamental terms there is still a big difference between the European stock markets, especially the German stock market, and the U.S. stock market because the U.S. is indeed at the end of the business cycle, you can see corporate earnings coming down. But this is rather different in Europe, where the momentum is clearly upward, and enterprise earnings are going to be stronger over the next few quarters."

In the transition economies of Central and Eastern Europe, the broad feeling appears to be that they will be able to ride out the present squall, and that nothing fundamental has changed. In Warsaw, Pawel Demczuk, analyst with Woods and Co., says investor sentiment is negative, and that people clearly want to avoid being over-exposed to risks at present:

"We in Poland have already very low prices on some stocks, and my view is that we could go even lower, but to counter that we have a very strong zloty, which is a big stabilizing factor. The actual outlook is quite good."

In Tallinn, Anvar Samost, the head of business news at Baltic News Service, says that, as in Poland, stock market prices are already low in Estonia, and that because of this, further dramatic falls are unlikely in the long run. He says that also as in Poland, investor confidence is low, and brokers don't see much of an improvement soon. He further says that the key factor for Baltic markets, Tallinn especially, are movements on the neighboring Scandinavian markets.

The Scandinavian markets, led by Stockholm, were down following the events in New York.