Fears mount that US rate hike will trigger shares crash

FEARS are sweeping through London and other international financial centres this weekend that Tuesday's meeting of the US Federal Open Market Committee could spark further plunges on world stock markets. Many strategists forecast that the market will plunge below levels not seen since February this year, when the Fed first raised interest rates.

The trigger for a market fall could come next week with a further half-point hike in US interest rates. Another potential flashpoint is the US trade talks with Japan, which reach a key stage at the end of the week.

And the continued increases in commodity prices remind investors that inflation may not be under control. The gold price, a traditional hedge against bear markets, hit a 13-month high of dollars 396 (pounds 251) an ounce in London on Friday. Traders reporting strong buying from US institutions. A sharp correction on Wall Street would feed though to shares in London, where the FT-SE 100 index of leading shares last week tried to bounce off the important 3,000 level. Trading in London has been nervous in recent weeks, with further signs of inflation unsettling dealers. The index closed up seven points at 3,028.2 on Friday, after touching 2,999.2 in early trading.

David Shulman, chief strategist at the Salomon Brothers investment house in the US, said: 'It smells a lot like the market of 1987. I am expecting to see a 10 per cent correction on Wall Street. It has already started.'

In October 1987, markets around the world fell by hundreds of points, wiping billions off share prices in the biggest crash since 1929. Mr Shulman added: 'There is a shortage of capital needed to run an expanding global economy and a bull market at the same time. One of them has to suffer, and it is my view that it will be the financial markets - not the real world economy.'

Nick Knight, the renowned forecaster at Nomura Equity Research, said: 'Events are taking on a decidedly ominous tone. Stronger than expected economic data last week, worse than expected trade numbers this, with currrency and bond market weakness finally kicking the legs out from underneath the equity market.'

Commenting on the prospects of higher US interest rates, Mr Knight added: 'Higher short rates run the risk of triggering the worst-case scenario - a stampede out of the equity mutual funds into cash.'

Deadlock in the US trade talks with Japan could increase the market jitters. There are fears that an increase in trade tension could send the dollar into free fall, which will put further pressure on US treasury bonds, dragging equities down.

Not everyone on Wall Street is bearish. Abby Cohen, US portfolio strategist at Goldman Sachs, said: 'Do we have greater volatility? Yes. Do we have greater uncertainty? Yes. But the inflation and earnings outlook are not as bad as many people think.'

Corey Miller, equity strategist at James Capel, forecast that the FT-SE would reach 3,350 by December and move ahead to between 3,700 and 4,000 by the end of next year. 'We believe that London has a cushion, as the differential between London and Wall Street is 800 points. Wall Street is close to its high, while London still has some way to go.'