Stock Markets Recent Strength – Cause For Optimism Or Fear?
The themes in the news really remain focused on the state of the economy with the key GDP statistic released on Friday unexpectedly bad. Company specific news of any major significance remains secondary.
The strength of the FTSE continues to surprise as it still manages to cling on to its best run since 1993 with the index closing the week above 4,500 some 10.9% rise since the start of the latest rally. This reading is all the more strange given that every forecaster expects any recovery to be frail at best, with the BOE being the dissenting voice at the start of the week, however the GDP figures released on Friday showing the drop in output now at 5.6% and the quarterly fall of 0.8% more than double the 0.3% average expected by City analysts.
Part of the reason for the rally in global indeces could be explained by the fact that hedge fund assets under management continue to recover, particularly in the US. There is also some speculation that the glut of money still in China could be finding its way into funds that are used for stock market investing. Can the rally continue? One commentator in the weekend’s papers pointed out that developed markets are looking expensive when compared to historical valuations, and that the levels of emerging market indeces almost defy belief. Another interesting comparison that was made in the same article was that of Japan – the Nikkei 225 halved in 1990, it then rallied for five months, which coincidentally this latest rally has been ongoing. Japanese stocks then proceeded to halve in value over the next 19 years.
There is ongoing mention in the press that bankers are still being paid large bonuses angering the general public on both sides of the Atlantic. This is exaggerated given that they still display an obvious reluctance to lend to small businesses with last month’s figures showing a further fall. The FSA’s chairman’s comments that banks could be forced to set aside more capital against loans is likely to serve to worsen the issue and his comments give some insight as to the thinking within the Basel committee that sets the standards for capital requirements for the world’s banks.
The UK Government borrowing in June came in at record of £13bn vs. £7.5bn a year ago on falling tax revenues. This can only be expected to increase and the spectre of tax rises must also remain a threat if this trend continues.
The worry that Swine flu is likely to affect the retail sector despite the positive data out in the week is still evident as Next calls into question some of its more bullish forecast following a good start to the summer after weather in June. The only possible winners from a worsening of the pandemic remain the drug companies with Glaxo SmithKline say that an order for its Relenza treatment could generate revenue of £600m.
Other news in retail states that Waitrose and Morrisons are the best performing supermarkets in the UK at the expense of rivals’ market share.
On the negative side there are still signs that the British public are reluctant to spend their hard earned money on going out with pubs apparently closing at a rate of 52 a week as British drinkers reign in their past habits.
Back on to the housing market and despite a decent month on month rise in mortgage lending figures it still seems as though there are problems out there as close to 10% of agreed purchases in the UK are not able to complete as the buyer is unable to secure the necessary mortgage financing they require.