FEARS of a crash on world equity and bond markets after Friday night's sell off on Walt Street proved unfounded, although share and bond prices fell sharply yesterday before recovering in later trading.
In Dublin, more than £300 million was wiped off the value of shares with the financials suffering most in the wake of the 171 point fall on Wall Street on Friday. Both the Dublin and London stock markets were at one stage over 2.5 per cent down on the day, but both recovered after prices rallied on Wall Street. Last night the Dow Jones index closed up 110.55 points at 5581.00.
Dealers reported good sized dealing in some of the financial shares and AIB in particular saw some heavy early selling. Yield sensitive financials tend to trade in line with bond prices and as a result fell in line with the fall in bond prices on the Dublin market. The ISEQ index of Irish shares finally closed down 45.19 points at 2330.59,
But once US Treasury bonds rebounded and the bulls seemed to get the better of the bears in early trading on Wall Street, the Irish market took on a better tone.
AIB recovered from a low of 320p to close down 5p on the day on 325p. Bank of Ireland, however, fell further and was down 11p on 424p, while Irish Life did even worse with a 14p fall to 241p. Irish Permanent was down 7p on 378p.
The London market lost over 70 points in early trading but the FTSE 100 index closed down just 1 per cent at 3674.5, as the improved tone on Wall Street filtered through to the market.
Analysts believe the main factor influencing share prices in the next few days will be how bond markets respond to US economic statistics due to be released later in the week.
Tomorrow sees the publication of the Federal Reserve's Beige Book and US retail sales figures, followed by producer prices on Thursday and consumer prices and industrial production figures on Friday. If any of those statistics hit bond CS then stock markets will quickly respond, say analysts.
By the time the Dublin market closed, the Dow had regained almost a quarter of its 171 point losses of Friday as investors focused on the high technology and cyclical stocks which are seen as the main beneficiaries of economic growth. But analysts have warned that, while some stocks will benefit from a stronger US economy, others will suffer in the absence of a cut in US interest rates - the prime factor behind last Friday's sell off.
Bonds also staged a minor rally yesterday, but still ended below Friday's close. The Irish 10 year bond opened down three quarters of a point after a further sell off of US Treasury bonds in the Far East.
Traders said the market then marked time ahead of the US Treasury market opening But contrary to many people's fears, the US market rallied by over a point and European bond markets took heart.
The five year Irish 8 per cent bond closed at 102.35 to yield 7.23 per cent from 7.07 per cent on Friday. The 10 year due 2006 closed at 99.30 to yield 7.93 per cent, from 7.84 per cent at the previous close.
The market is now awaiting the release of the Federal Reserve's Beige Book.
However, while long term interest rates on bond markets are likely to remain under pressure, short term European interest rates are still expected to fall. Analysts are expecting the Bundesbank to cut its key discount rate before the end of the month.
Dr Dan McLaughlin, chief economist at Riada Stockbrokers, said the "markets got ahead of themselves" due to uncertainty.
"People remember the massive sell off in bond markets in February 1994 when the Fed began to raise rates. Although you can argue its a different world now with rates unlikely to be rising, there is a residual nervousness," he said.
But the chances of European interest rate cuts are still quite high. "There may be another cut in Britain and the Germans may well cut this Thursday or in two weeks' time," he added.
