Analysis: Unpredictability is the one constant that refuses to budge, writesCliff Taylor, Economics Editor

Financial markets, driven lower by fear of war and the recent diplomatic wrangling at the UN, have rallied as the war draws closer.

The uncertainty is lifting, investors seem to reckon, deciding it was time to buy again ahead of what many military analysts predict will be a quick victory for the US-led forces. By late yesterday the rally was stalling, as the unpredictability of the situation again starting weighing on the minds of investors.

In 1991, stock markets rallied on the very day the first cruise missiles landed and subsequently US stocks soared by 20 per cent and oil prices tumbled. This time around, investors have moved to get in even before a shot is fired.

Are the markets setting themselves up for another fall? At very least they must now be vulnerable to any disruption to the "quick war" theory. And given the uncertainty, not only of the military situation but also of the wider political picture, the betting must be that further volatility lies ahead.

Even assuming a fairly rapid military victory for the US, the fall-out for the wider Middle East and for relations between the US and the rest of the world remain unpredictable and has the capacity to affect already poor economic growth prospects - and thus the financial markets - in the weeks and months ahead.

Nor will the markets be reassured by the restoration of the "code orange" alert in the US in fear of further terrorist attacks.

In what appears to now be the inevitable run-up to war - and in the aftermath of the outbreak of hostilities - a number of key indicators will be monitored each minute on the market.

The Oil Price: Brent crude prices fell almost $2 a barrel to just under $28 yesterday, well below recent highs of over $33. In the optimistic "quick war" scenario, analysts predict that prices might "spike" upwards on or just before the outbreak of fighting, but quickly fall back thereafter.

The risks to this scenario are fairly clear: a more prolonged conflict; damage to Iraqi oil facilities; or, most seriously, some military action which disrupts the supply of oil from the wider Middle East. Iraqi oil production - in excess of 2 million barrels per day - has already stopped flowing onto world markets, but for the moment markets believe that Saudi Arabia can make up the shortfall. Unrest in Nigeria, another significant producer, is another concern.

International oil reserves can also be released onto the market, though this is sensitive as OPEC will not wish prices to be driven too low. Ireland has around 120 days of reserves, Minister Dermot Ahern told the Dáil last week and, if required, these would be released under the aegis of the International Energy Agency co-ordinating action. In the long term, there will be much focus on moves to redevelop the Iraqi oil industry. Former Saudi oil minister Sheik Yamani has predicted Iraq could increase production four-fold by the end of the decade. Others put the potential output considerably lower and billions of dollars of investment will be needed.

The price of gold: Gold, the traditional safe-haven, has risen sharply in price, touching a six-and-a-half-year high of $388 an ounce last month, before easing to around $340 now. If the course of the military campaign - or the fall-out from it - leads to serious market nerves, then expect gold to shoot back up again.

The US dollar: War nerves - and the lack of international backing for US action - have led to dollar weakness, somewhat reversed over the past couple of days. The euro has climbed as high as $1.10 recently, before easing to around $1.06 yesterday. A short and successful war will tend to support the US current, but a longer conflict would undermine it. The size of the US balance of payments deficit and the budgetary cost of war are other factors leading to nervousness about the outlook for the US currency.

Stock markets: As one analyst put it yesterday, the markets are pricing in the end of the war before it has even started and that carries risks. As with the US dollar, a quick war may help to underpin share prices, but after the recent rally the markets may be vulnerable in the days ahead.

Investors remain uncertain about whether shares are now good value. Even after recent falls, shares are not overly cheap on the basis of expected earnings - particularly in the US. Meanwhile, the US economy continues to suffer from the aftermath of the boom, with industry still suffering from overcapacity and high debt levels in business and among consumers, while the big euro-zone economies are in even worse shape. Hopes for a quick market rally after the war must also contend with these factors.