Wall Street tumbled late on Monday after an inflation warning from Ben Bernanke, the Federal Reserve chairman. Earlier, skittish global equity markets were unsettled by fears of a slowdown in the US economy and a further rise in oil prices.
Turkey and Taiwan took the spotlight, with fresh turmoil in their currencies and equities amid the broader negative trend on markets.
US markets fell after Mr Bernanke said the Fed needed to be “vigilant” on inflation, in spite of slowing economic growth. The news raised speculation that the Fed might once more raise interest rates when it meets later this month, reversing sentiment on Friday when much lower-than-forecast employment growth in May led many traders to think the US central bank would go no further than its current 5 per cent rate.
A rise of more than $1 in oil prices to above $73 a barrel in early trade added to worries. Oil prices spiked after Iran warned energy supplies would be disrupted if the US made a “mistake” against it. The warning coincided with market fears that US refinery production might be disrupted by this year’s hurricane season.
By the close, the S&P 500 index was down 1.8 per cent; the Nasdaq Composite was down 2.2 per cent and the Dow Jones Industrial Average was down 1.8 per cent to its lowest level in 12 weeks.
In Asia, Taiwan had its biggest one-day fall for two years on concerns over political instability. The Taiwan Weighted index fell 3.5 per cent to 6,715.27 as pressure mounted on President Chen Shui-bian over corruption allegations made against his administration and family members.
In Europe, the FTSE Eurofirst 300 index retreated 0.6 per cent to 1,305.65. Turkish assets were hit hard in a continued fallout to data on Friday showing inflation in the country jumped 1.88 per cent month-on-month in May, for an annual rise of 9.86 per cent. “Like an uninvited drunken uncle, a significantly higher-than-expected consumer inflation [figure] dashed hopes of a respite in the Turkish financial markets,” said Mehmet Simsek, strategist at Merrill Lynch.
The ISE National 100 index dropped 3.4 per cent to 37,964.83 while yields on a benchmark bond maturing in April 2008 traded as high as 19 per cent. The Turkish lira initially extended Friday’s 3.4 per cent decline a further 1.5 per cent but rebounded to trade 0.3 per cent higher as traders speculated the Turkish central bank would raise interest rates sharply when its monetary policy committee meets on Wednesday. The lira also touched a record low against the euro before recovering to trade firmer against the shared currency.
“We think a 50 basis points hike in its overnight deposit rates, currently at 13.25 per cent, is likely,” said Mr Simsek. “However, this may not be enough. We believe that the deterioration in inflation expectations requires a more powerful and enduring monetary tightening.”
Speculation over monetary policy tightening, this time at the European Central Bank, helped the dollar slump to a one-year low against the euro. The dollar slid to $1.2979 against the euro at one point before rallying after Mr Bernanke’s remarks. The ECB’s governing council is expected to raise its benchmark rate by at least 25 basis points to 2.75 per cent on Thursday when it meets in Madrid.
However, Elga Bartsch, economist at Morgan Stanley, said: “There is a distinct possibility that the ECB could surprise the market and us by making up for lost time and hiking 50bps.”
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