International financial markets are suffering from a serious bout of the jitters, due to the host of uncertainties affecting the world economy. The crisis in Russia, ongoing concerns about Asia, upheavals in many of the world's smaller financial markets and the problems of the US president, Mr Clinton, have combined to lead to significant falls in international equity markets and the worst day seen on the Dublin stock market for quite some time. It is something of a cliche to say that financial markets hate uncertainty. But the extraordinary mix of factors now affecting international markets is starting to really rattle the nerves of investors. Having worried for months about whether the collapse in Asian markets would spread, they are now watching as Russia faces the same type of pressure evident in many Asian markets. Meanwhile, concerns are growing about the impact of events in Asia on the level of economic growth and, in particular, on corporate America.
The impact on the markets has been significant. Share prices have fallen heavily in the past couple of sessions, with the US market weighed down by fears over Asia and Mr Clinton's position and European markets also affected by the crisis in Russia. For a while yesterday a really serious fall in the US looked likely, with the Dow's fall approaching 3 per cent in near-panic selling at one stage, before a late rally.
Meanwhile, all investors are looking nervously at further collapses in emerging markets - the collective name given to smaller and newer markets in Latin America, Central and Eastern Europe and the Far East - where investors are pulling out fearing a Russian-style devaluation. Much as the European currency crisis of 1992/93 led investors to focus on whether EU governments could maintain their currency pegs in the European Monetary System, the crises in Russia and Asia have focused the spotlight on a range of markets as far apart as Venezuela, Brazil and Poland. In Warsaw, for example, the zloty fell 7 per cent, worsening nerves in other European markets about the spread of the crisis. Meanwhile, US markets were affected by nervousness in neighbouring Canada and Mexico, as well as fears of an all-out crisis in Latin American as the intense pressure on Venezuala to devalue continued.
For the major international markets, the impact over the past couple of days has been predictable. Share prices have fallen as investors worry that company profits will be affected by events in Asia or slower world economic growth. In many markets bank stocks have been particularly badly hit, particularly in Germany where the banks are exposed to events in Russia. Meanwhile, the flight from equities and the uncertainties in emerging markets are leading investors to put money into the one area where they feel their funds are secure - government bonds in the major markets. Bonds also appear a good investment because inflation is very subdued and may fall further due to the impact of the Asian crisis on growth and also the falling price of commodities such as oil.
This flood of money into government bonds has led to falls in long-term interest rates, with German 10-year interest rates yesterday hitting an all-time low of 4.25 per cent and US long-term rates dipping below 5.5 per cent for the first time. In Dublin, 10-year interest rates (bond yields) fell to 4.566 per cent from 4.643 on Thursday. Meanwhile, fears of slower international economic growth should also mean that European short-term interest rates remain low as we enter the euro. On equity markets, analysts are divided on whether the latest events represent the start of significant decline, or are merely a short-term correction. Over the next couple of weeks, nerves will certainly remain on edge as Russia tries to pick its way out of its crisis, while emerging markets look set to remain under heavy pressure, raising fears of a domino-type crisis. And the political fallout from the bombing of Sudan and Afghanistan represents another cause of nervousness.
