Markets braced for uncertain week despite Russian moves

World markets are braced for another uncertain week and open today amid continued uncertainty about the political situation in Russia. Yesterday there were pledges by the European Union and the Group of Seven leading industrial nations to encourage Russia to press ahead with economic reforms, but markets will open nervously as the Russian parliament debates the appointment of a new prime minister.

Russian officials yesterday clinched a political deal that would give parliament greater influence over policy while President Yeltsin would also pledge not to dissolve the Duma until its term expires late next year. However, the financial markets will be closely watching the reaction of President Yeltsin and also the debate in the Duma, where the Communists have said they will oppose the agreement and the appointment of Mr Viktor Chernomyrdin as prime minister, with the threat that this could create greater political and economic instability.

The G7 main industrial countries and the IMF are trying to ensure that Russia pushes ahead with economic reform, and the G7 and the EU are trying to ensure a common response. The German Finance Minister, Mr Theo Waigel, yesterday urged Russia to press ahead with market reforms in spite of its political and finance crisis. "It is up to Russia, first and foremost, to decide for itself that it must carry out reforms. And when these decisions are made . . . confidence will return - which is necessary for the finance markets and for the stability of currency rates," he said.

The rouble went into free fall after President Yeltsin sacked Mr Sergei Kiriyenko as prime minister and recalled Mr Chernomyrdin, who had been discarded five months before. Mr Waigel said he was optimistic that Mr Chernomyrdin would not turn the clock back and attempt to return to the old Soviet-style command economy.

"I just cannot imagine he will go back. That would be disastrous for Russia. Russia needs international capital. Russia needs to be linked with international finance institutes. Russia needs foreign investors. A return to the command economy would be devastating for the people and for the economy," he said.

Germany is Russia's closest political ally in the West, its biggest trading partner and largest foreign lender, with debt exposure of over 75 billion deutschmarks. Around DM16 billion are covered by Germany's Hermes export credit guarantee scheme. The German Chancellor, Mr Helmut Kohl, spoke to President Yeltsin by telephone about the crisis yesterday.

Developments in Asia, Russia and Latin America will continue to drive markets in the coming week. As the global crisis spreads, markets will become increasingly anxious about the impact of the crisis on the fundamentals of the US and UK economies. Interest rate sentiment is beginning to change, with markets now speculating that rates in major economies will be cut as world growth slows down.

Developments in international markets will dictate the direction of the pound. While it remains vulnerable to further falls against the dollar and sterling, volatile stock markets should limit its downside. Irish interest rates should remain relatively stable again this week with the outlook for larger than expected cuts in rates by year end improving on the back of the influx of funds out of equities into bonds.

As the interim season gets into full swing, this week will see half-year figures from Kerry Group, CRH, Smurfit and Waterford Wedgwood. However, the performance of the Dublin market will continue to be dictated by international events.

The first batch of US economic data for August will be important, with the NAPM index due tomorrow, but are likely to be overshadowed by events in Russia and Asia. Meanwhile, the European Central Bank holds its first meeting this week after its summer recess. While interest will be keen, any announcements are likely to be of a technical nature, with the Central Bank still discussing appropriate policy instruments. The Bundesbank also meets this week but no change in policy is expected.