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Iraq fighting feeds sharemarket volatility

Escalating violence in the Middle East and a surging oil price is expected to test riskier assets this week, but sharp falls in shares could be tempered if the world's biggest central bank goes ahead, as expected, and tapers its stimulus program.

Some traders are worried that Australian shares remain vulnerable to a 5 per cent to 10 per cent correction and all that is needed for that to occur is the right trigger, be that downgrades to earnings, economic growth or a crisis situation. But there is little suggestion of that happening on Monday, with the market to open flat, according to the ASX SPI futures.

''We have seen a day or two of volatility as people worried about what is going on in Iraq,'' said David McDonald, chief investment strategist for Credit Suisse Private Bank in Australia.

Fears Iraq may be the catalyst of the next market shock weighed on global sharemarkets last week.