With the end of the first half of 1999 now almost upon us, it is worth reviewing developments in the financial and stock markets over the year to date, compared with the consensus view at the beginning of the year.

In some respects economic and financial developments have been as expected. Inflation has remained low throughout the world and there is little sign of serious upward pressures.

Interest rates and bond yields have stayed broadly within their expected ranges and in general stock markets have continued to deliver very attractive returns to investors throughout the world.

Although economists and financial analysts can feel reasonably happy concerning the broad thrust of their predictions, there have been some significant surprises.

The surprising trends evident in the cross rates of the major currency blocs of the dollar, euro, and yen epitomise where financial forecasters and pundits have got it wrong so far in 1999. The euro arrived in a blaze of glory and was confidently predicted to go over the 1.20 level against the dollar. Now, as it languishes just above parity against the dollar it is currently almost 20 per cent below the levels of earlier forecasts.

So why did currency analysts get it so wrong during 1999? The nub of the issue lies in the actual development of the European and US economies versus expectations during 1999. The long-awaited recovery in European economic growth simply failed to materialise in the first half of the year. This lacklustre pace of economic growth led to a reduction in interest rates by the European Central Bank to 2.5 per cent. On its own such a reduction could have been expected to cap any potential strength in the new currency. However, the other side of the coin has been the unexpected strength in the US economy.

The US economy has continued to grow at close to a 4 per cent annual rate of growth. This has put upward pressure on US interest rates and the dollar. It is the combination of surprisingly strong US economic growth and surprisingly weak European growth that has led to such a weak euro.

Despite the vagaries of the currency markets, stock markets so far in 1999 have been strong, led by sharp rises in the Japanese and other Far Eastern stock markets. European markets have lagged somewhat, but have still produced good returns in local currency terms.

Ironically, it is the stock markets of the faster growing European peripheral economies that have performed worst so far this year. The Irish market is one of these and the overall index is now below the level at which it started the year.

The table shows how the Irish market is still significantly below its previous highs. The overall index is just under 8 per cent below the peak reached in July 1998, while the financial index is still almost 20 per cent below the peak that it hit in February of this year.

Forecasters of the Irish stock market were confidently predicting another year of strong returns and, of course, they could yet be proved right. However, the fact that the Irish market has been weak relative to overseas markets does mean that many Irish shares are now offering good value.