Markets give thumbs down to Fed rate cut

World stock markets dived again yesterday, as investors gave the United States Federal Reserve the thumbs down for failing to jump-start the American economy with a sharp reduction in borrowing costs.

Worried that the 0.5 percentage-point cut to interest rates which the Federal Reserve announced on Tuesday would not stop the US economic slide, European investors headed for the exit, following Wall Street's lead.

The FTSE 100 index of top shares fell more than 100 points to finish at a 27-month closing low of 5,540.7.

In Paris, the CAC 40 index of leading shares fell 114.64 - or 2.2% - to 5,023.76 points, while the DAX index at Germany's Deutsche Börse was down 169.4, or 2.9% at 5,612.76 points.

After closing down 238 points at a two-year low on Tuesday, the Dow Jones industrial average declined a further 156.83 to 9,563.93 in midday trading.

"We're in a bear market quite definitely, and rate cuts aren't working," said one senior London equity salesman.

Investor disappointment spread to Europe, where hi-tech and telecommunications companies were hit by declining confidence.

Shares in Finland-based Nokia fell 5% as the mobile telephone manufacturing group's annual meeting failed to provide a lift to investor enthusiasm. BT, France Télécom and Deutsche Telekom were also among those to fall sharply during the day.

Drugs and consumer companies were among those hardest hit by yesterday's blue-chip sell-off. Procter & Gamble fell after reports that it may be forced to cut up to 20% of its workforce, while Johnson & Johnson's share price declined as investors worried about the impact of a recession.

Electronics group 3Com also reported a worse than expected quarterly loss.

Pressure is now mounting on the European Central Bank to rescue the markets by cutting interest rates at its meeting next week.

German business confidence has collapsed to an 18-month low, according to figures published yesterday.

Yesterday's selling was largely prompted by continuing disappointment that Alan Greenspan, the chairman of the Federal Reserve Board, had not opted for a bigger interest rate cut this week.

Adding to the market's woes, new American inflation figures raised the spectre of "stagflation" - rising prices alongside falling output.

The US consumer prices index - which tracks the cost of goods and services paid by consumers - increased by 0.3% in February, more than expected by most analysts.

Art Hogan, the chief market analyst at Jefferies and Co, the brokerage, said: "There is both irrational disappointment that the US Federal Reserve could have done more - which would have meant that the outlook was even bleaker - and a more rational concern based on the fundamental news coming from companies themselves."

In spite of the difficulties of the past week, the US market was braced for more bad news. The quarterly earnings season, when companies report the outlook for future performance, is only halfway through.

Useful links
Federal Open Market Committee
New US international trade figures for January
New York stock exchange market information