Stocks slide on fresh US fears

Alan Greenspan's first rate cut sent shares surging

The revival in global share prices was thrown into reverse on Friday as further evidence emerged of the US's economic slowdown.

Stocks closed weak on Wall Street following data showing that job growth in the US is slowing, and fears over bank losses to struggling utilities.

The decline had earlier curbed investor enthusiasm in Europe fuelled by Wednesday's cut in US interest rates.

Markets snapshot (Friday close)

US, Dow Jones: -2.3%

US, Nasdaq: -6.2%

Frankfurt: +0.1%

London: +0.20%

Paris: -1.0%

Tokyo: +1.2%

Benchmark share indices in both Frankfurt and London closed up slightly on the day, although well below highs.

In Paris, the index of top stocks ended 1.0% lower.

In New York, the Dow Jones Industrial Average of leading shares closed 248 points lower at 10,664, while the tech-heavy Nasdaq index ended 159 points down at 2,406.

Fewer jobs, slowing economy

While the extent of Wednesday's rate cut - 0.5% - was a surprise to analysts, fresh employment data prompted concerns that the US central bank may need to take further action to stem the country's economic slowdown.

Friday's employment figures showed that job growth slowed to 84,000 a month in the last quarter of 2000, half the rate seen at the beginning of the year.

While the economy created 105,000 jobs in December, the manufacturing recession gathered steam, with 65,000 factory jobs lost during the month.

"The employment numbers, although they were close to expectations and maybe a little bit weaker, confirm that the economy generally is slowing," said Hugh Johnson of First Albany.

Stan Shipley, of Merrill Lynch, predicted that the Federal Reserve, the US central bank, would cut interest rates by another 0.25% at its 30-31 January meeting.

Investor jitters

Investor nervousness was demonstrated in the mounting tension which followed news that Bank of America was to make a statement, amid rumours it had made loans to a troubled Californian utility.

It's hard to make the case that an interest rate cut is the solution to all problems

Bill Meehan, Cantor Fitzgerald

While the statement denied "any significant losses" on any activities, Bank of America shares closed $3-15/16 lower at $47-9/16.

"It's hard to make the case that an interest rate cut is the solution to all problems," said Bill Meehan, chief market analyst at Cantor Fitzgerald.

California's two biggest utilities are rumoured to be on the verge of bankruptcy after running up $8bn in wholesale power bill which cannot, because of a state price freeze imposed in 1996, be passed on to consumers.

Tax cut issue

Meanwhile, US president-elect George W Bush said that his $1,300bn tax cut plans may have to be speeded up to help kickstart the slowing US economy.

"I think that tax relief is necessary; the question is how fast we implement it," said Mr Bush on Thursday, after a meeting in Austin, Texas with company executives.

Many economists agree, arguing that the 0.5% cut in interest rates by the US central bank on Wednesday cannot revive the economy on its own.

But the tax cuts are politically controversial, with a divided Congress, and it is unlikely to come into effect for at least a year.

Helping the real economy

There is also disagreement on whether the Fed action makes a tax cut more or less urgent.

"While financial markets can react instantaneously to changes in Fed policy, the real economy takes much longer, and the recent trends in the US economy are quite weak," said Robert Sinche of Citibank.

However, others pointed the important psychological effect on the stock markets and on consumer confidence of the Fed move.

"What it clearly does is to change the psychology on the markets. That is what he is aiming to do and so far it looks like he's been successful," said Jim O'Neill of Goldman Sachs.