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Al-Ahram Weekly 18 - 24 May 2000 Issue No. 482 
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Published in Cairo by AL-AHRAM established in 1875 |
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Al-Ahram Weekly 18 - 24 May 2000 Issue No. 482
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| Published in Cairo by AL-AHRAM established in 1875 |
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Egypt Region International Economy Opinion Culture Focus Features Heritage Travel Living Sports Profile People Time Out Chronicles Cartoons Letters Black Friday on Wall Street
By Mahmoud Abdel-Fadil *Finally, on 14 April, the bubble burst and the New York Stock Exchange plummeted in what has been dubbed "Black Friday." The world's money markets panicked, and share prices in Asia and Europe collapsed. Investors rushed to dump their stocks for fear of further price falls. Stock markets in Singapore and Seoul witnessed record falls in share prices. Blue chip stocks suffered the highest losses on the Hong Kong market since the Asian stock market crisis of 1997.
In Europe, London was the worst hit, with the Financial Times Index registering a four per cent drop. The French CAC 40 index registered a 4.8 per cent drop, the German DAX 3.5 per cent. Trading collapsed on the Moscow stock exchange; the electronic trading system on the Russian market fell by 7.2 per cent of its total value within ten minutes of the start of trading. Losses increased, reaching 7.5 per cent of the index value, forcing the stock market management to close trading for half an hour to halt any further decline.
Repercussions were felt on Arab stock markets, which suffered modest losses as compared to the drop worldwide. The Egyptian stock market was affected by the crash in markets for US tech NASDAQ stocks. The general index for the Egyptian stock exchange regressed markedly at the end of trading on Sunday 16 April, by 9.39 percentage points. A statement issued by the Cairo and Alexandria Stock Exchange (CASE) attributed the decline to the efforts made by investment managers of international financial portfolios to adjust to the situation in accordance with the new developments taking place in countries where they invest, including Egypt. The daily report issued by the Capital Market Authority (CMA) explained that the decline in the general index for subscription companies, which is more expressive of the state of the market, had registered 33 percentage points. The report alluded to the sale of stocks by foreigners, which had increased to 22 per cent of total trading as compared to 15 per cent at the previous closing.
The Dow Jones Wall Street industrial average had registered a record fall in stock prices on 15 April. The index for blue chip stocks had dropped by 5.7 per cent, the NASDAQ index for new economy stocks plunged by 355.4 points. Investors panicked and rushed to sell for fear of a further drop and final collapse in stock prices.
Analysts attributed the "unprecedented" price dive on 14 April to the following causes: The collapse in the prices of Microsoft after a court decision convicted the company of monopolising the global software market; the illogical rise in the price of tech stocks in previous periods, as a result of frenzied competition to purchase stocks in such companies, which finally caused the bubble to burst; and the rise in inflation rates in the US since March 1999, which raised expectations that the Federal Reserve Bank would raise interest prices on dollar deposits. It is common knowledge that raising interest rates triggers the prompt sale of stocks and a shift in demand to bonds and bank deposits, which have a fixed and guaranteed revenue.
Certain reports place the plunge in the New York Stock Market at no less than $2 trillion dollars, possibly even as high as $10 trillion. Many large investors, including certain Arab investors, lost billions in only a few seconds. Al-Walid Ibn Talal is said to have lost $1.5 trillion on his tech stocks on the New York Stock Market on that day.
The Egyptian stock market suffered from the earthquake that shook Wall Street, and from the aftershocks that reverberated across Asia and Europe. In Egypt, panic-stricken investors sold their portfolios as fast as they could, fearing further decline. Buying stagnated, and the total drop is estimated at 7.8 points, bringing the market down to its lowest level in over a year. Brokers and traders alike describe the developments on the Egyptian market as the effect of trading on the London Stock Market, which suffered from the plunge on Wall Street.
The drop in Egypt was focused in Egyptian companies, which issue Global Depository Receipts (GDR) on the London Stock Market. Fear reigned among local traders, apprehensive that foreigners rushing to sell would cause a further drop in prices. These fears were justified. As prices of most stocks that had been robust on the market started to fall, mobile company share prices plummeted by 4.8 per cent and media stock dropped by four per cent. As a result of the selling frenzy, stocks accumulated as demand regressed. Investors reacted by crowding outside the premises of the Cairo Stock Exchange to protest the government's inaction in the face of collapse. Investors claimed that they had suffered 40 per cent losses over the past two weeks and asked for state intervention to halt the fall.
The reaction of Egyptian investors to the fall in stock prices is typical of investors trading on any stock market in the world. Investors are always urging the government not to interfere when prices are on the rise, but as soon as market forces come into play and they fall victims to their speculative weaknesses, they call on the government to do something to stop the decline. This, however, is the essence of capitalism, and history is rife with incidents of disastrous plunges in stock markets. We can count several "black " Mondays and Fridays in recent history. The problem resides in the confusion of stocks with lottery tickets, which always have a chance of winning. Hence small investors are easily carried away by their hopes of a killing, but only big investors and seasoned speculators are the ones who can play it right and reap great fortunes without sweating on trading floors, which now resemble casinos more than they do anything else.
* The writer is professor of Economics at Cairo University.
