It has been a turbulent week for the financial markets and more volatility may lie ahead. Fears of higher interest rates have led to sharp falls across the major economies. By last night, the markets looked a bit calmer but any economic figures pointing towards higher interest rates may provoke further share-price falls. Close attention will be paid to today's US employment report for December which may provide clues to the likely timing of the next increase in interest rates by the Federal Reserve Board.
Observers might well ask what has happened to prompt the change in market sentiment over the past week or so. It has been clear for some time that interest rates in the US, Europe and the UK were likely to rise this year. Yet share prices in many of the bigger markets - particularly in the technology sector - have stormed ahead regardless, until this week's bout of nervousness.
It can be a mistake to look too closely for the reasons for change in market sentiment. What can be said is that the turn of the year appears to have concentrated the minds of investors on the prospect of rising rates, leading them to question the levels at which some shares have been trading. Growing evidence of stronger economic growth on both sides of the Atlantic has led to a reassessment of the extent to which interest rates may rise over the course of the year.
After the initial general drop in share prices, the main stocks to suffer over the past couple of days have been in the technology sector. In many cases, share prices in this sector had risen to extraordinary levels in recent months and some fall-back is to be expected. The US Nasdaq market, for example, where many of the world's main high-technology shares are quoted, rose by 85 per cent last year - and has fallen back by some 10 per cent this week. Are investors right to be concerned? Certainly, growth in the US and the UK is picking up quickly and inflationary pressures are evident in both markets. Interest rate increases by the Bank of England and the Federal Reserve Board can be expected soon, but there is no reason to expect the kind of sharp increases which would seriously dent growth prospects.
In the main euro-zone economies, growth is also recovering. However, the Continental EU economy is at a much earlier stage of recovery than those in the US or the UK and the dangers of rising inflation are that much less. The European Central Bank increased interest rates in December and there is no strong case for another rise in the short term. That said, the next move in euro zone interest rates will certainly be upwards.
The Republic's economy, of course, has boomed in recent years and suffers from inflationary pressures in areas such as housing. However, despite this, most Irish shares have languished, affected by fears internationally about the sustainability of Irish economic growth and a focus by investors on the larger euro-zone markets. Share prices here will suffer from any international nervousness, but their relatively low valuation should protect them from serious losses, barring a major international collapse.