Global stock markets are likely to remain volatile this week as investors wait for further intervention from European central banks and the US Federal Reserve to calm nerves.
European central banks are standing ready this week to stem the turmoil in money and credit markets after the Fed moved on Friday to cut the discount rate it gives on loans to banks and hinted at a cut in its main interest rate.
Financial markets rallied after the announcement and, if the move calms US nerves this week, European central bankers are likely to follow.
With normality far from being restored, central bankers insist they can take further action if circumstances merit. Short of changing rates, the European Central Bank (ECB) can lend at longer maturities, reducing the need for its banks to access more expensive funds in the markets.
Central banks' willingness to act follows three weeks of turmoil, with the panic sparked by problems in the US subprime mortgage market leading to a global "credit crunch" and the third major sell-off of equities in just over a year. Although the Fed's decision to cut its discount rate led to a rally in world markets, US stocks were driven down late on Friday night after cash management firm Sentinel filed for chapter 11 bankruptcy protection.
Fears of further financial bombshells rose as a second German state-owned bank, Sachsen LB, was bailed out after its off-balance-sheet investment vehicle, Ormond Quay, failed to secure finance in the commercial paper market.
The crisis claimed its first Irish casualty last week with the collapse of the Dublin-based firm, Structured Credit Company (SCC), with liabilities of $350 million (€259.5 million).
Investors have also been left bruised, as the Iseq index of Irish shares underwent its worst period since 2001-2002.
The index is down almost 14 per cent since the start of the year, with some €19 billion wiped off the value of Iseq companies since the index reached a record high on February 21st. The decline has been more severe than in other markets because the Iseq was already suffering from concerns about the Irish housing sector when the subprime storm hit global markets.
But despite the lack of visibility, some investors may look at the decline of almost 9 per cent in the market since August 8th as an opportunity to buy stock at low prices. The fundamentals of Irish companies now look attractive if investors return to them, Davy stockbrokers said. "It now seems that the market has moved to a point where it is effectively discounting significant earnings downgrades going forward," said Davy economist Robbie Kelleher.
But market sentiment worldwide remains fragile, with investors wondering if the Fed will follow Friday's cut with an early cut in the main US interest rate, ahead of its official interest rate policy meeting on September 18th.
"If the move does not alleviate the liquidity problems gripping the markets this week, then the Fed can be expected to introduce an emergency cut in the Fed funds rate, probably within a matter of days," said Paul Ashworth of Capital Economics.
The ECB governing committee is due to make an interest rate announcement on September 6th, with the chances of it going ahead with a planned hike in its base rate receding.
(Additional reporting: Financial Times service)
