Conditions in the financial markets are eerily similar to those that
precipitated the “Black Monday” stock market crash of October 1987,
according to leading City analysts.
A report by Barclays Capital says the run-up to the 1987 crash was characterised
by a widening US current-account deficit, weak dollar, fears of rising inflation,
a fading boom in American house prices, and the appointment of a new chairman
of the Federal Reserve Board.
All have been happening in recent months, with market nerves on edge last week
over fears of higher inflation and a tumbling dollar, and the perception of
mixed messages on interest rates from Ben Bernanke, the new Fed chairman.
“We are very uncomfortable about predicting financial crises, but we
cannot help but see a certain similarity between the current economic and market
conditions and the environment that led to the stock-market crash of October
1987,” said David Woo, head of global foreign-exchange strategy at Barclays
Apart from the similarities in economic conditions, during the run-up to the
1987 crash there was a sharp rise in share prices worldwide and weakness in
bond markets, Woo pointed out. “Market patterns leading to the crash of
1987 resemble the markets today,” he said.
Equity markets settled on Friday after sharp mid-week falls, with all the main
American stock-market measures recording small gains on the day. But nerves
Gerard Lyons, head of research at Standard Chartered, said: “The volatility
is explained by tighter liquidity conditions, markets pricing in more for risk
and dollar vulnerability. But people forget that this is not a case of emerging-market
economies being in trouble as in 1997-8. They’re in good shape.”
The vulnerability of stock markets is likely to add to the case for a prolonged
pause before the Bank of England hikes interest rates, analysts believe.
While one member of its monetary policy committee (MPC) voted for a rate hike
earlier this month, some recent data, notably subdued labour market conditions,
suggest few signs of inflationary pressure.
Base rate is unlikely to rise until next year, according to a survey of analysts
by Ideaglobal.com, a financial-research consultancy. It finds a median expectation
that the rate, currently 4.5%, will rise in February next year.