The Greenspan effect

Federal Reserve Chairman Alan Greenspan continued to spook the US share markets on Monday, particularly the traditional blue chip companies in the Dow Jones index.

On his 74th birthday, Mr Greenspan did no more than reiterate his recent message that the US central bank would have to raise borrowing costs to avert inflation, but it was enough to depress market sentiment.

Alan Greenspan wants to curb share market "exuberance"

The Dow Jones reversed all of Friday's gains to finish the day 196.7 points lower at 10,170.

The slide came after a rise of more than 5% last week.

Enthusiasm for "new economy" stocks and the belief that they could better absorb interest rate increases saw the technology heavy Nasdaq spend most of the day in positive territory, only to succumb to the sombre mood in late trade.

After coming within 20 points of hitting 5,000, the index slipped 9.92 points to close at 4,904.

Many technology companies raise funds through venture capital and stock offerings, making them, in theory, more immune to rising interest rates.

"It is still a tale of two markets," said Peter Coolidge, senior equity trader at Brean Murray.

"The higher interest rate environment seems to hurt stocks of the 'old economy' while there is an argument to be made that technology and bio-technology shares are somewhat immune to interest rate increases. The problem is that this is getting somewhat overdone," he said.

'Nothing new'

In a speech in Boston, Mr Greenspan repeated his message of last month that gains in the stock market had helped boost demand in the economy to a level where it could no longer be met by supply and this risked stirring inflation.

Some analysts said Mr Greenspan was deliberately talking down the markets.

He has repeatedly warned that he believes that stocks are over-valued - and that people who spend their paper profits before they cash them in are contributing to the overheating in the economy.

"There wasn't anything greatly different from the Humphrey-Hawkins testimony," said Bill Meehan, chief market analyst at Cantor Fitzgerald.

"But sooner or later, the Fed will get its way. They always do."