Securities Industry Europe

Mutual fund fever is sweeping Europe. With short-term bank and bond yields in much of Europe lower than even U.S. interest rates, individual investors in Europe have been shoveling cash into stock funds at a brisk pace in search of higher returns. Salomon Smith Barney Inc. analyst A.

Europe's equity markets, red-hot in the first quarter, turned mixed in the second quarter as high stock valuations and jitters over interest rates and Asia triggered some profit-taking. Still, for the first half of 1998 overall, European markets have utterly dominated global performance charts--reflecting widespread optimism about coming monetary union. While the U.S. Standard & Poor's 500 index is up 17.

The London Stock Exchange joined its biggest rival, Frankfurt's Deutsche Boerse, in a surprise alliance Tuesday, laying what both sides hope is the foundation for a single European stock market. Negotiated in secrecy over the last two months, the strategic pact unites the Continent's two largest exchanges in a project to make it cheaper and easier to trade major European stocks.

Investors looking for a haven in European stocks may have been startled to see the markets there dip even more sharply recently than those in the United States. After drops of more than 1% on Monday in markets throughout Europe--even worse in Germany and France--the major European stock indexes are down slightly more from their mid-July peaks than are the Standard & Poor's 500-stock index and the Dow Jones industrial average.

U.S. and European stocks could drop 15% to 20% in the next several months, and the decline is likely to drag Asian markets lower as well, strategists at Morgan Stanley Dean Witter & Co. warned Tuesday. The firm raised the cash weighting in its "Macro Navigator" model portfolios and reduced its exposure to U.S., European and Asian stocks, according to a report by investment strategist Robert J. Pelosky.

Officials said Wednesday that Nasdaq's role in the soon-to-be-merged Anglo-German bourse propels its European ambitions and moves it closer toward its ultimate goal of erecting a global market. Founded in 1971, Nasdaq has grown from a place to trade stocks over the counter to an electronic market that now is the chief rival of the 208-year-old New York Stock Exchange.

The French, Dutch and Belgian stock exchanges, facing stiffening competition from global online trading networks, could announce as early as today that they intend to merge. The unified exchange would be Europe's second-biggest behind London, trading stocks with a combined value of $2.17 trillion. Paris would make up two-thirds of that capitalization.

Parlez-vous capitalism? In Paris--not to mention Bonn, Rome and Madrid--the answer these days is a resounding yes. And for foreign-stock mutual funds, that translated into great gains in the first quarter. The average foreign stock fund tracked by Morningstar Inc. climbed 16.2% from Jan. 1 through last Friday, outdistancing even the robust gains in the U.S. stock market.

The Nasdaq Stock Market said Tuesday it will spend $63 million to acquire control of Easdaq, a small European securities bourse that specializes in initial public offerings, as part of the U.S. market's plan to provide 24-hour global trading. Nasdaq, the second-largest U.S. stock market, earlier had sought a foothold in Europe by trying to form a joint venture with two of Europe's three largest markets, the London Stock Exchange and Deutsche Boerse.

The Paris Bourse is planning an alliance with European exchanges left out of the partnership announced between the London Stock Exchange and Frankfurt's Deutsche Boerse, its chairman said in interviews. Jean-Francois Theodore, chairman of SBF-Paris Bourse, which owns the French stock and derivatives markets, said that by September Paris intends to present plans to form a rival federal exchange including Spain, Italy, the Netherlands and Belgium.