A strong rise in US share prices last night is likely to lead to a sharp recovery on Irish and European stock markets today.
After its dramatic 6.4 per cent fall on Monday the Dow Jones index regained well over half its losses yesterday.
But most observers still believe that stock markets are facing a period of extreme volatility. Investors are still trying to decide whether the events of the past week are merely a correction of over-valued stocks or whether deeper-rooted problems in the world's economies will drive the markets into further decline.
Ahead of Wall Street's 3.9 per cent rise last night, the Irish stock market had lost nearly all its 1998 gains, with share prices down by almost five per cent. This wiped over £2 billion off the value of Irish shares.
The Irish market failed to benefit from a strong recovery on European stock exchanges after share prices fell heavily in early trading. Big gains on Wall Street came too late for the European markets, but London, Frankfurt and smaller peripheral markets such as Dublin are likely to rise sharply this morning.
At its closing level last night the Irish market was almost 26 per cent lower than its April all-time high, while the value of Irish shares has fallen by £11 billion since that high point.
Brokers said that there was little volume in yesterday's dealing in Dublin. Trading throughout the day mainly involved private investors who were panicked into selling as a result of the near-record fall on Wall Street on Monday. Financial shares suffered most from the selling. Shares in Allied Irish Banks and Bank of Ireland fell by £1 in early trading before bargain-hunters forced the stocks back up to more respectable closing levels.
While investors welcomed last night's strong recovery on Wall Street, few believe that the current instability is anywhere near an end, with uncertainty continuing to cloud the outlook for Russia and countries throughout Asia.
Yesterday news that Barclays Bank had written off the bulk of its loans to Russia at a cost of £250 million - and that major Japanese and US banks were doing likewise - illustrated the impact of the latest events on western financial interests.
Meanwhile, Wall Street is currently divided between two camps, each led by a major investment bank. One camp is headed by Goldman Sachs, which believes that the collapse in share prices is totally unwarranted, while the other is led by Merrill Lynch, which is forecasting an imminent global economic slowdown.
According to Merrill Lynch, investors should put their money into US government bonds, where huge demand drove interest rates to their lowest level for 20 years yesterday before bond prices weakened slightly.
Merrill Lynch predicts that any recovery on Wall Street will be followed by a further weakness as share prices move in line with a slowdown in corporate profits. In contrast, Ms Abby Cohen, an analyst with Goldman Sachs, maintained that there had been an excessive fall in share prices.
Share prices lost 0.3 per cant - 44,46 points - to 14,325 on the Nikkie stock average in first trading on the Tokyo Stock Exchange early today.