Dow plunges to five-year low as rate hopes fade

DAVID USBORNE

New York

PAUL WALLACE

and DIANE COYLE

After galloping for months through one record high after another, stocks on Wall Street stumbled dramatically yesterday as the Dow Jones Industrial Average plunged 101.5 to 5,075.21, its steepest one-day fall since 1991.

The market was made nervous by a one-hour delay in trading at the start of the day on the New York Stock Exchange because of computer problems, and was also unsettled by three factors:

oContinuing deadlock in talks on a new US budget;

oDwindling hopes of a cut in interest rates at a meeting of the Federal Reserve today

oAn accelerating sell-off of high-technology stocks.

There were similar declines on the Nasdaq exchange and on the New York bond market.

Hopes of a cut of half a point in interest rates at today's Federal Reserve meeting were abruptly dampened by news of the failure of President Clinton and the Republican Congress to end the budget dispute in Washington DC, which has triggered a second partial shutdown of the US government in as many months. Many investors had apparently been assuming that the crisis would have been resolved by yesterday.

In London the FT-SE 100 fell 46.5 points - the biggest drop since early October - to close at 3,596.1.

The pound ended the day close to its all-time low of 82.2 on the Bank of England's trade-weighted exchange rate. It fell to 82.5 from 83 on Friday. Against the mark, it fell by 2 pfennigs to close at 2.2028.

Fears that the Fed would keep rates on hold led to a sell-off in US Treasuries. The benchmark US 30-year long bond fell by almost a point, taking its yield to 6.15 per cent. Gilts fell sharply, with the benchmark 10-year bond losing half a point.

Mike Rosenberg, head of international fixed income at Merrill Lynch in New York, said: "The bond market has been setting itself up for a correction - people had been getting too bulled-up on bonds."

Philip Isherwood, equity strategist at Kleinwort Benson, said: "The markets need a clear message on interest rates and the budget."

Despite the turmoil in the markets, there was still some optimism that rates might fall today. Mr Isherwood said: "On balance we still expect a rate cut that would lead to some sort of rally."

The dollar's weakening on the foreign exchanges was not helped by the smaller-than-expected reduction in Japan's trade surplus in November - at $6.6bn, over $1bn more than had been anticipated.

Japan's trade surplus dropped by almost a quarter in November compared with a year ago, with a particularly marked decline in the trade gap with the US. The decline occurred mainly because of rising imports of computers, aeroplanes and semiconductors from Asia.

Following the spectacular 42 per cent fall in October the year before, the market expectation had been for a bigger decline to $5.4bn.

Imports in November rose by 11 per cent from a year earlier to $28.8bn, while exports increased by 3 per cent to $35.4bn. Imports from Asia ran at $10.8bn, up 17 per cent.