Euro Shares Quiet, Hang Seng Slips, Tokyo Rules Better

European shares were modestly weaker yesterday, with London taking in its stride a sooner-than-expected quarter point rate rise by the Bank of England. Announcing the hike to 7.25 percent the Bank said inflation had not moderated as much as expected despite sterling's appreciation since the autumn. Sterling strengthened and analysts said the cloud had a silver lining.

"The balance of risks implies that a modest further increase in interest rates is necessary to meet the inflation target of 2.5 percent in the medium term," the Bank said.

Financial markets had been expecting rates to remain unchanged for the third month in a row, but the FTSE 100 index, already 10-15 points down on the day in thin trading, drifted rather than tumbled a further 30 points on the news for a total loss of around one percent.

 

Even a weak opening on Wall Street -- the Dow slipped more than 20 points in the first few minutes before steadying -- did little more to upset the FTSE or other European markets.

Analysts said a further UK rate rise had been expected sooner or later, but that making it sooner brought its benefits. "It brings forward the top of the rate cycle," said SocGen analyst Andy Hartwill.

"It means you can take a more sanguine view on 1998 as far as interest rates are concerned."

"At the moment any rise in interest rates is not helpful," said Richard Kersley, strategist at BZW, in view of the current Southeast Asian turmoil. "But in the long term this is probably almost as much as we will see."

On money markets, sterling felt an immediate boost, climbing to 2.9101-37 marks from 2.8933 and $1.6900/10 from $1.6765.

Earlier, the Bundesbank said it was keeping German rates unchanged, as the markets had expected, and the Bank of France, with an eye to EMU convergence, said it would do the same.

Despite a fall in September German industrial orders, the mark was firm, partly as an effect of its gains against the weak yen. The dollar also hardened further against the Japanese currency, trading in Europe at six-month highs against the yen above 123 yen.

"The fundamentals in the US are still strong, and dollar/yen at 125 is not too aggressive a target," said Audrey Childe-Freeman, economist at CIBC Wood Gundy in London.

Economists noted also that US and Japanese monetary authorities were showing no signs of intervening to slow the dollar rise.

On the stock markets, both France's CAC-40 and the German DAX were around one percent off in thin trading, with operators blaming lack of buying impulse and the Asian weakness rather than any serious downward pressure.

Meanwhile, Hong Kong stocks slid sharply in late trade to close well down yesterday, buffeted by currency and interest rate uncertainties, and brokers said any declines on Wall Street overnight would compound the weakness. "The market is a bit agitated by the rise in mortgage rates," said a broker at a large British house. "But it has been less and less volatile, essentially range-bound."

The Hang Seng Index closed 269.19 points, or 2.52 per cent, lower at 10,412.56 but off the day's low of 10,364.89. Turnover climbed to a moderately active HK$16.32 billion, higher than Wednesday's HK$14.40 billion.

Tokyo stocks, however, ended slightly higher, helped by purchases of high-techny shares. But brokers said gains were limited as financial issues were weak, depressed by worries over turmoil in Asia as well as the aftermath of Sanyo Securities Co Ltd's business failure. The Nikkei 225 finished 85.82 points or 0.52 percent higher at 16,533.87. Its December futures, however, were down 10 at 16,430.