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Market barometer: US markets sneeze - we catch a cold

Friday 8th December 2000

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Standard & Poor's 500 (weekly data)

The US sharemarket is giving the world the jitters as evidence emerges of a sharp slowdown in the US economy. The Federal Reserve's medicine of higher interest rates has started to take its toll.

Manufacturers report lower capital investment and reduced new orders. Consumer confidence has dropped sharply over the last part of this year. The growth of credit card debt is slowing.

Much has been made of the well-publicised downturn in the information technology sector, but department store stocks are down an average of 30% on an expected weak Christmas period.

The betting is starting to turn toward an easing of interest policy by the Federal Reserve. The next federal open markets committee meeting is set for December 19.

The Federal Reserve may use the meeting to signal a shift from hawkish to neutral on interest rates, with possible cuts in store next year. Already shorter-dated US debt is rallying on firm demand in anticipation of the Federal Reserve move. A rally in fixed income instruments may herald the return of interest to come in sagging equities.

Main US measures are soft. The Dow Jones industrials index is hovering at 10,500 still, but the Standard & Poor's 500 (illustrated) is slumping ominously toward 1300.

The Nasdaq is a slaughterhouse at the 2500 level. Many top high-tech stocks like Microsoft are down 50% or more. The Australian ASX100 is slipping at 2650. At home, the NZSE top-40 capital index is weak at around 1950. Its fortunes are not aided by an unloved Telecom, ailing under sharp resistance at 600cps.

The NZSE smaller companies capital index, formerly a bright spot, has dived back down to the 5000 area. Shares will be softer in New Zealand on both local and overseas interest rate concerns.

A rise in the New Zealand dollar could accelerate any mergers or takeovers in the pipeline while our equities are still cheap for foreign investors.

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