Markets poised for more volatility

RENEWED trading volatility is likely in financial markets this week amid continued jitters that the Eurozone's sovereign debt woes remain untackled, according to leading City analysts.

After a week of see-saw trading in shares and bonds, market analysts say the danger of Spain and Italy needing a financial bailout is still preying heavily on investors' minds.

German Chancellor Angela Merkel and French President Nicolas Sarkozy are due to discuss the euro crisis in Paris on Tuesday after a week of bruising losses on both European and US markets.

On the same day, official inflation data is set to show British households remain under pressure. The Office for National Statistics is tipped to reveal that inflation rose to 4.4 per cent in July compared to 4.2 per cent in June.

Although traders say the inflation rise is unlikely to have much effect, given that it is forecast to hit 5 per cent this year, investors remain extremely anxious over the situation unfolding in Europe.

But City veteran David Buik, of BGC Partners, said: "This is the most volatile I have known the market in 49 years in the City. I've never seen anything like it. Wall Street was all over the place last Tuesday and the smell of fear and political inertia is strong.

"That volatility could remain until September, maybe Christmas, until the markets believe these unimpressive bunch of politicians are getting to grips with the sovereign debt issue in Europe."

City pessimism comes despite a recovery over the final two days of a stormy trading week, with the FTSE 100 closing up a total of 6 per cent over Thursday and Friday.

Michael Hewson, markets analyst at CMC Markets, commented: "I don't see much changing in financial markets next week. It will remain very nervous.

"The actions of France, Italy, Spain and Belgium in banning the short selling of financial stocks is just a sticking plaster. It resolves nothing in terms of the significant problems the Eurozone is facing.

"The politicians' and central banks' response in the 2008 crisis was far more credible, but I suppose it is easier to bail out banks than countries."

Some respite to stock market bearishness has come from reasonably decent jobs and retail figures from the US, published in the latter part of last week. Comfort has also been taken from the US Federal Reserve indicating American interest rates will stay where they are for two years to foster growth, and that it might consider further stimulus for the economy via quantitative easing.

But Ewen Stewart, equities' strategist at Investec, said: "The market is likely to stay volatile for some time.

"Even though corporate balance sheets are strong it is difficult to pick the bottom of this market."