Bonds and pound recover from panic

THE Irish pound and bond markets shrugged off the recent panic yesterday, following US and other European markets higher.

Sentiment turned up in all major markets after the much hyped speech by the Federal Reserve chairman, Mr Alan Greenspan, to the US Congress proved to be less pessimistic than many analysts had feared.

But they warned the reaction may be rethought over the next couple of days and could lead to a small sell off in Irish bond markets.

The pound closed at 103.46p against sterling, from 103.38p a day earlier. However, it filled to make any headway against the duetschmark, closing at 2.3850 marks from 2.3813 a day earlier. Traders said good corporate buying bid the pound up following Central Bank intervention the day before.

Dr Dan McLaughlin, chief economist at Riada Stockbrokers, said the Central Bank was likely to be pleased that the pound was now back within a 1 per cent band around the deutschmark. However, it was still bottom of the EMS grid, having fallen from top place in one day earlier in the week.

Mr Greenspan told Congress the Federal Reserve (the Fed) would raise interest rates if inflation pressures looked set to pick up.

In the twice yearly address to Congress, known as the HumphreyHawkins testimony, Mr Greenspan warned that low inflation could be coming to an end, particularly in the labour market.

The Fed chief peppered his testimony with warnings about the dangers of inflation, all but confirming market expectations that the Fed would raise rates next month.

"The initial bond market reaction was probably incorrect," said Mr Jim Power, chief economist at Bank of Ireland Treasury. "All the risks for inflation are on the up side. The market had built itself up for something much worse. After a rethink, the reaction will probably be a little more negative."

Dr McLaughlin agreed. "By definition Greenspan can't say anythingwhich would imply he should have raised interest rates earlier," he said.

He also warned that markets at the moment were very volatile. "I wouldn't trust the US reaction. After recent Humphrey Hawkins testimony we have seen a complete reversal of sentiment after the market has digested it," he said.

The markets are now looking ahead to German M3 money supply data due out either today or Monday. That could dictate the timing of the next German "repo" rate cuts, said Mr Power. US unemployment data on the first Friday in August will also be closely watched, he said.