Markets pull back as optimism wanes

The last seven days have been momentous.

Markets were staring into the abyss and decisive action was needed. By Monday morning that action had been taken all over the world. Governments were stepping in to seriously shore up the financials. Markets rallied and confidence soared. However, hangovers were soon to follow, and in the following trading days scepticism returned. While it looked as if the sharp panic selling had been stifled by the weekend's news and the US's new capitalisation plan, early week gains had been erased by Thursday. Real concerns still exist over the state of global economies and credit markets. Interbank lending rates are still stubbornly high, with the only liquidity coming in the form of central bank injections. On Wednesday, the ECB, BOE and Swiss National Bank offered lenders unlimited 7-day dollar funds for the first time ever in a coordinated effort to boost liquidity. They pumped more than $350bn into the lending markets.

While credit spreads did come down, longer term lending rates are still worryingly high. So from here it's very difficult to know where we are headed. While the risk of further massive declines in equity markets looks less likely, remember we have already lost more than 5000 points on the Dow, the overall economic prospects for the US and Europe are not inspiring. Central banks may need to continue to reduce interest rates in an effort to stimulate growth.

So how was Ireland fared through all of this? Well the Irish financials are certainly facing a headwind. Despite the Commission's recent approval of the Irish guarantee scheme, share prices languish. Some commentators suggest that Irish banks are now looking under capitalised compared to our UK neighbours, however our figures do stand up well to European norms.

Our three big banks are all operating with Tier 1 Capital Ratios (a measure of a bank's financial stability) of just under 6% compared with the likes of RBS and HBOS who have had their ratios boosted up to roughly 9% through Government intervention. In times when bad debts provisions are difficult to estimate, high capital ratios are vital in order to absorb unexpected losses. It could be argued that the UK have gone too far, and will make it more difficult for their banks to boost revenues down the line. The six main Irish banks have combined construction and property development loans of €39bn, €15bn of which are secured purely against property. So you be the judge of how much Irish banks will have to write down as bad debt. Dresdner Kleinwort for instance are estimating that AIB, Bank of Ireland, and Anglo will be writing off a combined €6.3bn in bad debt over the next two years. If the Irish banks do need to recapitalise then hopefully they can do so in terms more favourable than in the UK, where once private enterprises are being swallowed up by Government, halting dividends and charging 12% interest on their billions of pounds of preferencial shares. Irish banks are currently trading at a price-to-earning of almost 1-to-1, a figure which suggests real value at these levels, however it's very difficult to put a figure on future earnings and potential recapitalisation, and these are the key if you wish to invest.

Most Actives

Oil was not only our most actively traded product in the house this week, but also the most profitable. With mounting fears of global recession oil has continued to slide a further 11% this week.

With key technical barriers at $80 and $75 unable to halt the slide, the cry for $60 oil may not be too far fetched! However, the continued fall has caused concern for OPEC, and with an emergency meeting called in November, it seems very likely they will cut supply to try and keep prices from tumbling lower. Whether this will be effective remains to be seen.

With record breaking moves now the norm in the US indices it was no surprise to see the Dow Jones surge towards the top of the most actively traded contracts list. It's fair to say traders rode the wave pretty well, but anyone using a tight stop loss approach was taken to the cleaners.

The next move for the index is anyone's guess. The technical picture is a mess with such exaggerated moves in both directions, but it seems ever likely that last week's lows will be tested a lot quicker than first thought.

This week's most popular currency trade was the euro/yen.

As with most markets at the moment the movement of the equity markets seem to dictate movement in other markets.

This is the case with yen as it is seen as a safe haven trade. So as the markets rally the yen weakens and vice versa.

As you can imagine this has caused euro/yen to be very volatile this week. It is currently trading in a wide range from 131 to 140, and it looks as though that the lower end of the range could be broken soon.