With markets in free fall despite the attempted policy interventions around the world, analysts say that while assets may be oversold it’s too risky to step in and buy.

At midday Friday, S&P/TSX composite index was down 496.01 points, or 5.17%, at 9,104.14.

Volume, which approached 565 million by 12:45 ET on the TSX, was so heavy that trading glitches halted 38 stocks through most of the morning. The daily volume average, since the beginning of the year, is about 403.2 million.

In New York, the Dow Jones industrial average was dropping toward the 8,000 mark, falling 422.54 points, or 4.93%, to 8,143.43.

“A moderate rally is likely before long, given how far the markets have fallen, but there are rising fears now that this bear market could persist for many months given the rapidly deteriorating economic outlook,” says Global Insight Inc. in a research note.

The firm says that the U.S. selloff is being spurred on by growing fears over the health of the financial system and the rapidly-worsening economic outlook. “Out of nowhere a household-name bank or corporation can be brought to its knees by a liquidity crisis, and investors are panicked by the faintest rumour. General Motors’ stock fell 31% yesterday after Standard & Poor’s suggested a debt rating downgrade could be on the way,” it notes. “The stock falls are decimating the wealth of households and businesses and will inevitably hit their consumption and investment.”

Asian equity markets followed Wall Street down as the coordinated monetary policy action implemented yesterday failed to prevent a further tumble in shares amid fears of a global recession, it adds. “The convulsions in Asian markets, despite the limited risk of systemic crisis in the financial system, highlight the shift of the risk profile to the real economy. With Asian growth still highly dependent on external demand generated largely in the G3 economies, the prospect of a more protracted and severe downturn is increasing on an almost daily basis,” it says.

“There is a silver lining of sorts for major economies when one looks at the simultaneous falls on the commodity markets,” the firm points out. Lower oil prices are helping to ease price pressures, making it easier to cut interest rates. “The oil market trends do, however, spell problems for major oil exporters,” it adds. “The global credit crunch is also hindering oil producers’ efforts to raise capital and fund new investment.”

“Equity prices and other risky assets have been destroyed over the past few weeks and are now at extremely oversold levels,” observes BCA Research. “Still, it is early to add significant exposure,” it counsels.

BCA reports that the decline in the stock-to-bond ratio over the past year surpasses each of the bear markets during the previous four decades. At the same time, authorities across the globe continue to work aggressively to provide support to the financial system and asset markets, with the latest news being that the U.S. government may invest directly into banks to restore capital.

“Thus, a bounce may be overdue and could emerge at any time. Still, the risk/reward outlook remains poor and we would caution investors about playing any relief rally at this point. We are unlikely to get any positive economic surprises in the coming months and many investors are still looking to sell into any bounce,” BCA says.

“In these circumstances, policy-makers can find themselves stuck between a rock and a hard place. They have to react to the situation with decisive and bold measures, but in doing so they risk fuelling market fears that there is worse to come. If they are talking about further intervention in the banking sector, does this mean they are not telling us something? This seemed to be the logic in investors’ minds yesterday after news that the U.S. government is considering taking equity stakes in leading banks,” Global Insight says. “The coordinated interest-rate cuts by central banks in North America and Europe earlier in the week were welcome, but investors tended to see them as confirmation that economic growth is indeed slumping.”

In terms of the U.S. Treasury’s next moves, it is known to be considering a new two-pronged effort to provide additional props for the financial sector. The first would see guarantees for billions of dollars of bank debt, while the second may involve temporary insurance for all U.S. deposits, Global Insight says.

@page_break@“As yet, it is uncertain whether the United States and other leading economies will adopt the bank debt guarantee plan, or whether there will be coordinated action on deposit insurance. Officials gathering in Washington DC will nonetheless be under a great deal of pressure to show they are able to act in a coordinated fashion and take bold decisions,” it notes.

“That recent days’ policy interventions have not stopped the market rout is alarming and suggests we could be facing an extended bear market,” it concludes. “Rebounds will undoubtedly occur, but there are few now predicting sustained market gains in the near-term.” With the U.S. economy in a contraction mode, Global Insight is projecting that the FOMC will lower interest rates even further, with the federal funds rate down to about 1.00% in the next few weeks. Further cuts are also forecast for the other leading economies.

BCA notes that in the process of trying to convince Congress to pass the $700 billion dollar TARP plan, the Fed, Treasury and president Bush may have amplified the downturn by making the average citizen vividly aware that the U.S. is on the verge of a total financial collapse and economic depression. “In turn, redemptions have surged and consumers have closed their wallets,” it says. “Policymakers are getting increasingly aggressive in efforts to fix the credit crisis, but it is still too early to buy risky assets.”