GLOBAL stock markets remain on high alert amid warnings that the full impact of the credit squeeze has yet to emerge.
While generally benign US housing figures on Friday helped to steady nerves, analysts pointed out that the 3% rise in home sales related to July - a month before the liquidity problems that wiped billions off company values.
There is concern that
figures for August will reveal a deepening crisis in the US housing and construction sector that will have knock-on effects around the world.
Some believe last week's recovery in equities is only superficial and that a further period of volatility is on the horizon.
Fears that problems with the US sub-prime mortgage sector could soon spread to other parts of the housing sector would have far-reaching consequences for other global economies - Britain included.
Ken Wattret, chief eurozone economist at BNP Paribas, said: "We suspect that the problems are not just related to the sub-prime sector.
"Basically we've got a housing recession in the US - a very deep, long-lasting one."
Economists are saying that many of the underlying causes of this summer's credit squeeze still exist and have only been temporarily silenced by the efforts of the US Federal Reserve Bank, the European Central Bank (ECB) and others to stabilise global markets.
"In the bond market, you still see some evidence of seizure, for want of a better expression," said Wattret. "The level of short-term paper in the US has been incredibly low. People are keen to put their money in traditional safe havens. In the banking system, there's still a dash for cash. It [injections of liquidity by the US Federal Reserve, the ECB and the Bank of Japan] hasn't had much of an impact."
Economists anticipate problems with the US labour market, particularly in the construction industry, where it is predicted that there will be heavy job losses over the next few months. This would put another dent in US consumer confidence, which they say would have a knock-on effect for the rest of the world.
Andrew Smith, economist at KPMG, said: "It's going to take quite a lot of time for the uncertainty to go away. The biggest problem is people don't know who owns which assets. Modern techniques allow debts to be sliced, diced, repackaged and sold on by the original lender - and then these derivative instruments are themselves traded and possibly again repackaged and resold. The end result is that no one knows who ultimately bears the original risk - and the final owners may not fully appreciate exactly what they are holding."
The FTSE 100 index, which fell below 6,000 on August 16, closed the week at 6,220.1, up 150 points on the week before, buoyed by speculation that Ben Bernanke, chairman of the US Federal Reserve, may lower interest rates on September 10.
Nevertheless, anxiety about many of the financial institutions' exposure to the US housing market was still apparent. Barclays closed the week down 4%, while HBOS dropped by 1% after it emerged that it had been forced to bail out one of its subsidiaries, Grampian Funding.
