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Tuesday, August 11, 1998 Published at 17:20 GMT 18:20 UK

Business: The Economy

Why did the markets crash?

Wall Street, where the world's financial heart beats

Ever since the start of the Asian economic crisis one year ago, stock markets in the West have had a somewhat jittery time.

Until recently, however, most analysts believed that the crisis could be contained within the region.

Analysts now agree that this was an illusion.

Profit warnings

The economic collapse across south east Asia and the fact that even the region's powerhouse, Japan, is now in recession are directly affecting the profits of companies in Europe and North America.

This in turn makes current share prices unsustainable.

Investors usually calculate the value of a company by looking at its potential "price earnings ratio".

That measure the relationship between the group's share price and its earnings per share.

The higher the share price and the worse the prospects for profit, the more likely they are to sell the share.

If many companies suddenly have to issue profit warnings while the stock market is on a high, then the selling pressure can be overwhelming.

The result: as long as Asia's economic is in turmoil, Western stock markets will not calm down.

Yen trouble

But the news from Japan, Indonesia, Hong Kong and elsewhere continues to be bleak.

The Japanese yen has tumbled to an eight-year low against the US dollar. Because of that, Japan will not be able to afford many Western products. As demand dries up, so do company profits.

The same holds true for other Asian countries. While the yen is weak, their products cannot compete on international markets, dragging their economies even further into the abyss.

China syndrome

The biggest worry, however, is the future of the Chinese economy. So far the Beijing government has promised not to devalue its currency, the yuan.

But because the yuan is strong, China's exports are hurting. The recent floods have increased the economic pressure and the need to earn more hard currency.

But if China decides to devalue the yuan, this will trigger a nasty domino effect, where countries across Asia will devalue their own currenciesl, causing more economic trouble.

It is a vicious circle, which would hit Western companies once more.

Investors and traders on Wall Street, in London's City and in Frankfurt and Paris know this - and do not want to get caught on the wrong foot should it come to yet another economic meltdown.

Rita Schumacher, analyst at Nikko Europe, said: "For the short term we are definitely going to see a lot of volatility in the markets.

"Britain is going to be more hard hit than its European counterparts as it heads firmly into a slowdown."

She added that global markets were in for a "rough ride" as dealers doubted the extent of Japan's efforts to rebuild its troubled economy.

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