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. Last Updated: 07/27/2016

Greenspan Triggers Stock Tumble

COMBINED REPORTS


LONDON -- Stocks tumbled around the world Friday after U.S. Federal Reserve Chairman Alan Greenspan suggested prices on Wall Street were too high. But some markets showed partial recoveries late in the day.


With global markets down around 3 percent to 4 percent, wiping billions off the value of investments, traders were relieved to see that a big drop in early trading on the New York Stock Exchange was short-lived.


The Dow Jones industrial average was off around 140 points soon after the NYSE opened, but regained almost half of its lost ground after a few hours. Markets that were still open followed suit.


The scare was sparked by Greenspan's comments at a dinner meeting of the conservative American Enterprise Institute on Thursday, when he said the Fed must be wary when "irrational exuberance" infects stock and other asset markets because they could end up damaging the economy. Although inflation has been low, he said, under such conditions its future course was uncertain.


He said evaluating shifts in asset prices must be an integral part of the development of monetary policy.


"Greenspan sent a clear message to the markets -- 'Gentlemen, you are overdoing it, restrain yourselves,'" said one dealer in Paris. "He is puncturing the speculative bubble that fueled New York and other markets."


Analysts said stock markets, already said to be overbought in light of their recent huge gains, were on a hair trigger.


"In another market, his comments would have been ignored but he made them at a time when the market was extraordinarily vulnerable," said Gary Anderson of New York's Anderson & Loe, a firm that advises money managers. "The army of bulls, which had been on a blitzkrieg ... just suddenly ran into machine gun fire," he said.


Greenspan's comments came ahead of key U.S. employment figures for November -- a report which is one of most closely-watched monthly U.S. economic indicators.


Although European prices rallied toward the end of the day, traders and analysts warned that Greenspan's remarks would reverberate around world markets for some time to come, particularly with the next monetary policy meeting of the Federal Open Market Committee due Dec. 17.


Prices on the London Stock Exchange had dropped by about 4.2 percent at one point, but they finished with a much smaller loss on the day. The Financial Times-Stock Exchange 100-share index closed down 96.9 points, or 2.4 percent, at 3,954.3. Even if Wall Street prices were too high, many London analysts have said, stocks elsewhere have risen more slowly so are not perhaps overvalued to the same extent.


But waves of panic-selling pushed markets -- big and small -- broadly lower across Europe and Asia. The German DAX stock index fell 4 percent, while the French CAC 40 index showed a partial recovery to finish with a loss of 2.3 percent.


Earlier, the giant Tokyo market showed its biggest drop of the year, falling 3.2 percent. Prices in Hong Kong dropped 2.9 percent.


Bill O'Neill, international investment strategist at brokerage HSBC James Capel in London, pointed out that Greenspan may still not have an imminent interest hike up his sleeve. "I think what Greenspan was doing was warning the markets and relieving himself of the obligation" of raising rates to burst a speculative market bubble, O'Neill said.


"We live in an uncertain world," O'Neill said, "and I think he was just concerned about the market's momentum being only one way, and of the danger of a speculative bubble building up.


"But I don't see it has having important consequences on interest rate policy." ()