Over the past few weeks, stock markets seem to have begun to go into a summer lull. Many investors must be wondering whether 1998 could prove to be a year when the old adage "Sell in May and go away" proves to be correct. In general, share prices in the Western stock markets are still close to all-time highs. The last significant period of weakness occurred during the financial crisis in the Asian economies. However, once the initial shock of this crisis blew over, stock markets in Europe and the US resumed their upward march. Indeed, during the first quarter of 1998, many Asian markets recouped at least some of the losses suffered in 1997.

The current crisis in Indonesia has reawakened fears that Asia could be about to enter into severe recession. This could lead to general social unrest and further dislocation to the region's financial markets.

In assessing the potential negative impact of the situation in Asia on global financial markets, it makes sense to distinguish between the countries with extreme problems, such as Indonesia, and those with serious problems but which have a fundamentally sound political and economic infrastructure. In this regard, countries such as Thailand and Korea are likely to recover. The more developed economies in the region such as Japan and Hong Kong are likely to continue to grapple with slow economic growth. However, they are eventually likely to see some improvement. Indeed, investors in the industrialised world have up to now focused on the fact that slower growth in Asia has reduced inflationary pressures thereby helping to prolong the economic upswing in Europe and the US. Therefore, the current reminder that all is not well in Asia is likely to do no more than cause some weakness to firms which conduct a large proportion of their business in Asia.

So if Asia is not to be the cause of stock market weakness what other negative factors could be at work? One trend of note in recent weeks has been the tendency for financial shares to come off the boil. This has been in spite of generally very strong corporate results as evidenced by the recent full-year figures from the Bank of Ireland.

The changed investor sentiment towards financial stocks probably reflects several factors which taken together have been sufficient to create some selling pressure. First, there is growing interest on the part of regulators and consumer watchdogs in bank charges and interest rates. At home, the National Irish Bank scandal has acted as a catalyst in this regard.

Across the Irish Sea in recent weeks the British authorities have reprimanded sharply the Northern Rock building society. On April 20th, Northern Rock consolidated some of its account range and in the process downgraded some of its savings rates. This prompted the chairman of the Commons Public Accounts Committee to complain that banks were "cutting interest rates on existing savings accounts while luring new customers with high interest rates". Subsequently, the British Office of Fair Trading (OFT) has begun an investigation into retail banking practices and has warned banks about "unfair contract terms".

With regulators on both sides of the Irish Sea putting the spotlight on banks, and consumers becoming more vigilant, bank profit margins are likely to suffer in the medium term.

A further factor affecting the share prices of financials, has been the simple fact that they have risen to such high levels that some shareholders decided to take profits. This shift in sentiment towards financial stocks is, however, unlikely to develop into widespread market weakness.

The underlying fundamentals of low inflation and associated low interest rates and bond yields remain firmly in place. Most of the indicators point towards even lower bond yields in coming years. For example, the US Treasury has recently announced a cutback in its future issuance of new government bonds. This reflects that the US will shortly be enjoying a budget surplus.

In Europe, monetary union has fostered an environment where fiscal deficits are viewed with disdain. This is leading to a contraction in the supply of new government bonds creating downward pressure on the yields offered.

In Ireland, budget surpluses are likely for the foreseeable future enabling the Government to retire public sector debt. Short-term interest rates are being held at high levels because of the booming economy, but these will have to come down to euro levels by January 1st, 1999, at the very latest.

While the summer may prove to be a mixed one for investors, the medium-term picture is still sufficiently attractive to justify staying with the market.