Interest rate worries hit stock market

HAVING shed close to €6 billion in the previous two days, the Irish stock market lost further ground yesterday as investors worried that rising interest rates would damage corporate earnings.

Some analysts say there is in fact an emerging consensus that the global economy is heading for a higher level of interest rates because of fears that inflation was becoming a global issue for Central Bankers.

That debate has been raging within the ECB with president Jean Claude Trichet and the German Bundesbank anxious that the rising level of money supply in Europe will result in sharp price rises in the coming 12 months.

That has led some forecasters to predict the prospect of ECB rates rising a further 0.75% by early 2008, if the eurozone economy continues to do well and inflationary pressures push up the rate of inflation.

The ECB is mandated to keep inflation in the EU at or below 2% where it has been for the past eight months. However, the increasing strength of the economy has raised concerns among key ECB strategists that the strong growth and the build up in money supply poses a very real inflationary threat over the next 12 months. As a result investors continued to sell vulnerable stocks and the construction sector in particular lost ground.

Having lost 2.5% of its value on Tuesday and Wednesday, or roughly €3bn per day, the ISEQ fell foul of investor sentiment again yesterday and ISEQ 100 index fell by another 0.5% or €500m on the day.

Surprisingly the banks, deemed to be very vulnerable given the increasing worries for the economy held up well yesterday with Bank of Ireland and AIB recovering some earlier losses.

Anglo Irish Bank was an exception to that rule and fell 43 cent to €16.59 while, in the construction sector, CRH fell nearly 1% to €35.60 a dip of 35 cent on the day. Grafton Group lost 20 cent to €10.95 while in the drinks sector C&C were off 10 cent to €11.20, down 0.88% on the day.

In London the FTSE 100 closed down 0.27% at 6505.10, while in the US most markets opened lower reflecting the current negative interest rate sentiment.

In Wall Street, the Dow Jones was down 77 points at 13,389, while the Nasdaq was off 20 at 2,568.