Markets watch euro fall along with bombs

The market isn't quite sure what to make of the war in Kosovo. The usual war response is a flight to quality which generally means picking up some US Treasury bonds and selling anything with links to anywhere near the trouble zone. It doesn't matter that the US is usually involved in whatever the trouble is, people buy treasuries anyway.

The Americans knew enough about the Persian Gulf to know at least where the Gulf war was - Bill Clinton obviously felt that very few of them would have the faintest idea of where Kosovo or Montenegro or Serbia are, which is why, I suppose, he told them over and over again to take out their atlases and have a look. Depends on how old the atlas is, of course, because borders and countries and boundaries have changed so much in the last 10 years you wouldn't put any faith in your atlas. Much better to check out the Web.

Once the air strikes happened, both US treasuries and bunds traded in quite a narrow range and dealers began to think that cruise missiles and dogfights would have no impact on markets whatsoever. It is quite appalling to think that people are being killed and we think of it in terms of market impact. And yet, how else can people in the market think?

At the beginning of the offensive, it was the Greek markets (which have seen a lot of buying over the past year) which bore the brunt of the selling. This was based on Greece's proximity to the war zone and the threat of Albanian refugees pouring into the country, coupled with some scaremongering stories about the likelihood of Greece and Turkey ending up on opposite sides of the conflict.

These negative thoughts lasted about a day and a half and suddenly people decided that Greece was cheap and started buying again. But overall things went somewhat askew on Friday when those who hadn't been able to push German bunds higher finally decided to sell instead and the European bond markets went through a variety of support levels to leave holders feeling as though they'd been caught in a surprise attack.

Whether or not the Kosovo crisis had anything to do with it is a moot point. European markets have been trading uneasily for the last few weeks anyway as the value of the euro has continued to fall. There had been rumours late last week that the Germans were ready to intervene - but nobody was sure whether they were talking about the Bundesbank or the Luftwaffe.

Euro weakness has also manifested itself in sterling strength which is not really what people were expecting at the beginning of the year. Sterling is now more than 5.5 per cent stronger against the euro than it was in January and pressures continue to be brought on the British Treasury to ease rates, as a strong sterling is about the last thing the British manufacturing sector wants. The CBI's calls for rate reductions are as predictable as a Boris Yeltsin stomach upset as exporters turn in gloomy predictions for the next quarter.

The Monetary Policy Committee meets again next week so perhaps they'll have an Easter offering for the CBI. However, less than half the analysts surveyed by Bloomberg recently thought that the MPC would do anything.

And what chance of something from the ECB? Lots of hints and murmurings about lower rates which have been tempered by the lower euro so that people are not certain whether Wim Duisenberg will give the go-ahead despite the prickly thorn of Oskar Lafontaine having been pulled from his side.

If Otmar Issing, the ECB's chief economist is to be studied for clues, his most recent statements were pretty interesting. Mr Issing was forthcoming with his thoughts on growth in Europe, or, indeed the lack of it. He thinks that economic developments this year are a cause for concern, especially the sluggish growth in Germany which is affecting the euro zone. The most recent official comment from the ECB was that rates were on hold for the foreseeable future, but Mr Issing pointed out that the foreseeable future ends "when we cut rates". Just to help things along, the IMF also said the ECB should cut rates. Every time I look at interbank rates these days I have to blink because it's mind-boggling to see that every maturity out to one year is now below 3 per cent. The ECB meets on April 8th so we don't have too long to wait.

It's a busy time in Europe. EU leaders are due to meet their new presidentelect, Romano Prodi, on April 14th. His brief is reform. Naturally, no real reform is expected by anyone. Apparently Jaques Chirac has suggested that having fewer commissioners would be a good idea, but he has also said that he doesn't have wide backing for that suggestion. Why am I not surprised?

Meanwhile, back at the IFSC, spring has sprung with some new arrivals on the doorstep.

A selection of post-boxes suddenly appeared at the entrance to the centre. These new boxes come in a variety of shapes and sizes. And we've been asked our opinions on them. Yes, for the past few weeks intrepid market researchers have been garnering our thoughts on whether the oval box or the round box or the double-oval box looks better. Who knows? We were shown a picture of an old post-box with its engraved ER or GR on the front for comparison. The new ones are sleek and modern and they fit in with the IFSC. Mind you, they also look like some kind of experiment in genetic engineering. But since this whole place sometimes looks like an experiment in genetic engineering, what's new.

Sheila O'Flanagan is a fixed-income specialist at NCB Stockbrokers