Business Opinion:The new year is barely a week old and already the prospects for global markets look distinctly fragile and pressure is mounting on the European central bank to cut rates when it meets on Thursday, writes Dominic Coyle.

That is unlikely to happen. Jean Claude Trichet and the governing council have in recent weeks been stressing the need to beware of underlying inflationary pressures and, in their public pronouncements, members of the ECB have pointedly raised the prospect of raising rather than lowering rates. The bank has chosen to try to calm the market, instead, by injecting funds to ease the liquidity crisis among banks.

If anything, events last week will only serve to confirm their approach.

Markets started the new year with investors and traders looking to shake off the malaise of the latter months of 2007. However, these attempts were undermined by two shocks, both of which emanated from the United States.

On Wednesday, data indicated that, against expectations, the US manufacturing sector had contracted in December. On Friday, US monthly job figures came in at a 4½-year low, pushing the unemployment rate there up to its highest level in over two years.

Markets reacted immediately. In Dublin, it took just 10 minutes on Friday to wipe out the healthy gains chalked up in morning trade.

US and European indices have already erased some of the limited gains made last year, while the Iseq is just fractionally ahead. Indeed, the financial stocks which dominate the Irish market have lost further ground since the turn of the year.

And all that before the promised second wave of US subprime foreclosures.

Whatever about the corporate performance of the Irish market constituents, the US economy is set to be the dominant market influence on Anglesea Street in 2008.

Prior to the fading property boom, direction in Dublin was generally determined by events further afield. It was only the strength and timing of the property boom that made the Irish market attractive to institutional investors in its own right. No longer.

Strange then to see that Irish pension funds continue to be so heavily overexposed to domestic stocks.

Figures out at the end of last week indicated that the woeful performance of the Irish stock market last year cost Irish pension funds almost €3 billion in the last seven months of 2007 - more than half the total losses of €5.5 billion over the same period.

The feeling persists that, when it came to the issue of diversification, Irish fund managers were lulled into complacency. Put simply, the inclination to ride a bull market producing average returns of 24 per cent a year over the four years to the end of 2006 proved too tempting.

According to pension advisors Rubicon Investment Consulting, Irish group-managed pension funds continued in 2007 to have roughly 15 per cent of their total assets invested in Irish shares. And, among equity assets, Irish shares account for more than 20 per cent of all equities held by Irish funds.

To put that in context, the Irish stock market accounts for just 0.3 per cent of global equities.

Good pension funds are always looking to outperform the market and, in Ireland's case, the losses caused by the bursting of the dotcom bubble and the pressure created by tighter funding standards placed an added premium on such outperformance. However, it is not the job of pension funds to take unnecessary risks to boost performance. Keeping 15-20 per cent of funds looked up in an Irish market which is a minnow by international standards and prey to outside influence was folly at best.

The point is illustrated by the performance of AIB Investment Manager, which attributed its market-leading performance in group pension fund returns in 2007 in large part to its decision to reduce its exposure to the Irish market in the first quarter of the year - at the very time the Iseq was scaling historic highs.

Fund managers are now effectively locked in to an Irish market that seems set for another year of volatility. Selling down their holdings suddenly will only exacerbate losses in Dublin.

For now, employee pensions are inextricably linked with a very nervous Dublin stock market.

Happy new year.