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World falters as the US weakens

By Neville Bennett

Friday 27th September 2002

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World stock markets lost further ground this week after the US Federal Reserve kept interest rates unchanged despite growing evidence the US economy is weakening.

The Fed acknowledged the risk. Concerns about the effects of a war with Iraq have generated uncertainty.

The price of oil has surged over the $US30/bbl mark ­ a level linked historically with recession.

When the Dow shed 180 points to finish at 7683 (Wed, NZ time) it was at a four-year low. It has lost 42% in two years.

The Nasdaq is 76% off its high and at a six-year low. Its sorry performance illustrates the mayhem a bear market can inflict on tech stocks. The bad news is the bear has now got into other fields.

Aviation in the US is also a wreck, with some carriers filing for bankruptcy and others likely to follow.

Most aviation stocks can be bought for about $2. British Airways is also cheaper than it has ever been.

Perhaps the most troubled sector will prove to be insurance. Its companies need large reserves of capital earning a good yield to meet their obligations. Most have a substantial share portfolio.

When indices fall 40%, they have to decide whether to hold or sell to limit their losses. Much selling is now occurring and a panic is possible.

If insurance companies hold shares they have difficulty in sustaining their capital base, as AMP has discovered. In London, the huge Royal & SunAlliance has traded at its lowest level since September 1984.

London's blue-chip FTSE 100 has touched a six-year low of 3609. Banks, insurance, telcos and oils have led the way.

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