European markets set to weaken after sharp falls on Wall Street

EUROPEAN markets look set to open weakly today after a sharp fall in the US equity and bond market last night. On Wall Street last night a drop in bond prices was one of the main reasons for a sharp fall in equities, with the Dow Jones index closing down 65 points, or 1.2 per cent, at Just over 5565.

Irish bonds resumed their recent falls following the sell off in the US Treasury market.

An unconfirmed rumour that mutual fund house Fidelity had sold $10 billion (£6.2 billion) of US treasury bonds on Friday has sent the yield on US benchmark bonds up to 6.48 per cent from 6.32 per cent at the end of last week.

The Irish bond market was hit and the 10 year bond closed at 100.65 to yield 7.75 per cent compared to 7.66 per cent at Friday's close. Five year paper slipped to 103.25 to yield 7.01 per cent from 6.90 per cent last week.

In London the FTSE index of leading British shares ended down 36.1 points nearly 1 per cent at 3,704.2. Irish share prices ended only slightly lower, partly supported by the strength on CRH, which benefited from a large order from London.

The ISEQ index of Irish shares dropped 4.78 to 2319.67.

However European markets will remain nervous today after last night's late decline in Wall Street, where the market was hit by a bout of profit taking and nervousness in bonds.

"The focus this week is on what the bond market is doing and the risk the 30 year US bond will break through the 6.5 per cent yield barrier," said Mr Adrian Schmidt, an economist at Chase Manhattan.

Traders said a move through that barrier could trigger further weakness. "It's impossible to say how far it could go," a trader said.

European markets followed the US down and Britain was particularly hard hit ahead of the vote on the Scott report last night. Sterling was also weak and the pound rose to 103.25p in late trading from 103.10p at the end of last week.

The March British gilt lost three quarters of a point to 106.18, around last Wednesday's lows.

Traders said this is a serious global move and that efforts by many investment houses to say it is different from the massive self off in 1994 may not be enough to stem the flows. "It looks very like 1994, even if the inflation picture is different," a trader said.

Analysts also reported growing fears of a 1994 style slump in global bond markets, which could cause a sharp fall on Wall Street, seen as overpriced compared with other stock markets. The slide in US stock and bond prices undermined the dollar against the yen.

The US Treasury is scheduled to auction $18.25 billion of two year notes on Tuesday and $12 billion of five year notes on Wednesday. In Britain an auction of £3 billion sterling in gilts due in 2021 is set for Wednesday.

"Many players are holding their fire ahead of the auctions," said a trader. "But if they are not well covered we could see a serious sell off."