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Global market rally seen after Y2K fires blanks

LONDON: Global stock markets should greet the new millennium with a modest relief rally on Monday, after the world passed into the new year with little apparent Y2K computer damage, analysts said on Sunday.

After years of preparation and billions of expense, the lack of Y2K trouble will allow equity markets to resume their upward march and bond and foreign exchanges to refocus on economic fundamentals, they said.

Emerging markets may be in for an extra share of any rally, as investors who had shied away due to technology infrastructure concerns buy back in.

"With Y2K out of the way investors and central bankers can now focus on the underlying economic fundamentals which point to a strong global economy and ample liquidity," said Gerard Lyons, strategist at Standard Chartered in London.

"That will be reflected in surging stock markets in January in the U.S., in the UK, on the continent (of Europe) and also a reinforcing effect in Asia."

And while investors will be on the lookout for any emerging Y2K issues, strategists said that the threat of rising rates in Europe and the U.S. would now pose the most immediate threat to shares.

With Y2K out of the way, central bankers faced with buoyant economic growth will have one less reason to hold off raising interest rates, analysts said.

Equity markets around the world made a strong showing in December, taking total gains in 1999 to 25 percent in the U.S. and about 36 percent in Japan and Europe.

Stock markets were expected to enjoy their usual "January effect", or the annual rally in the first four trading days in January stemming from tax and portfolio-related transactions.

Some of the traditional upswing driven by New Year bargain hunters may have been enjoyed early in December, however.

"We've eaten a lot of the meat for next year in the last few weeks of 1999," said Dirk Ley, head of European equities sales at West LB Panmure in Duesseldorf. Still, analysts said, the overall tone to the market is expected to remain bullish.

"You always have a small January effect. We saw that happening a bit early in 1999, but we still expect large institutional investors to be coming back into the market again at the beginning of 2000," said Niels De Swart, strategist at KBW Wesselius Bank in Amsterdam.

EMERGING MARKETS SEEN OUTPERFORMING

But the real action in markets in the early days of January may be in emerging markets, where Y2K uncertainty has been removed and after the orderly end of Boris Yeltsin's days as Russian President. Yeltsin stepped down on Friday, naming his protege Prime Minister Vladimir Putin as acting president and moving presidential elections three months forward to March.

"It looks like Y2K has been a damp squib and this is excellent news," said Ashok Shah, head of emerging markets at fund managers Old Mutual. "Technically speaking I expect a full recovery. Many markets were held back and we should now have a relief rally."

Analysts said that Yeltsin's departure was on balance a positive for Russia, where shares jumped 16 percent in thin trading on the news on Friday.

"Of all the possible scenarios for Yeltsin's exit, it seems it was probably the least disruptive as far as the market is concerned," said Yuji Tashiro, a foreign exchange dealer at Daiwa Europe Bank in London.-Reuters