The FTSE 100 Index is widely expected to enjoy a slight bounce back when markets open today with a recovery on Wall Street last week helping to boost investor confidence.
But analysts warned that any rally for London’s leading shares could be short-lived as concerns over a credit crunch in global markets continue to weigh on sentiment.
The Dow Jones Industrial Average recovered by more than 100 points on Friday to close down just 0.2%, which should help calm nerves across Europe to see markets open slightly higher today.
The International Monetary Fund also moved to restore calm on financial markets following last week’s turmoil.
It said the current crisis was “manageable”, adding that the fundamentals supporting strong global growth remained in place.
David Jones, chief market analyst at CMC Markets, said: “We saw quite a bit of a recovery on Wall Street on Friday and this should help European markets.
“But it would be naïve to think the worst is behind us. It wouldn’t be surprising to see the market test the 6,000 barrier next week.”
He also cautioned that a fall below 5,980 could mark the end of the market’s four-year upward trend.
The Footsie lost 3.7% on Friday – its biggest percentage fall in four years - shedding around £60bn (€88) from the value of London’s leading companies.
The benchmark index has now dropped around 10% since its peak in June amid fears about about banks’ exposure to losses in the collapsing US sub-prime mortgage market.
These concerns have spread to the wider credit market as banks take a more cautious approach to lending.
Last week, national banks including the European Central Bank and the US Federal Reserve pumped emergency funding into credit markets for the first time since the 9/11 terrorist attacks in 2001.
The move came after French bank BNP Paribas froze three funds with heavy exposure to the US debt market, blaming a drying-up of credit. The news was seen as further evidence that America’s mortgage crisis had spread around the world.
While the move by central banks provided some relief to markets by helping to increase liquidity, there is also a danger that it will be taken as a signal that there is a wider underlying problem which could further add to investor uncertainty currently underpinning the market volatility.
Clem Chambers, chief executive of stocks and shares website ADVFN expects the Footsie to open up by around 50 points on Monday, with investors gaining confidence from the pick-up in the US.
He said: “We would expect the FTSE 100 Index to open up, but this is likely to be only a temporary bounce with the market set to be all over the place for the next 10 days, at least as sub-prime mortgage problems roll into the greater mortgage market.”
He warned that the market could see further falls similar to last week.
“The volatility is so large which suggests that the current correction could be very big. We could see the market return to the lows of last May.”
He added that movements in the Chinese and other emerging markets would be key in sealing the fate for equity markets across Europe.