Stock Market Commentary
June 22nd, 2008
As the bad news stories relating to the Credit Crunch show no signs of going away, is it really as bad as we are told?
The news stories that have dominated headlines over the past eight months include: the Northern Rock debacle, sub-prime losses, falling house prices, low consumer confidence and a government seemingly in a hole it has no way of digging itself out from. So it’s only natural to think that these factors should be having a major effect on stock markets.
But where do we go from here?
In the UK, equities have battled to keep going and, after falling back below the 5,500 level in March 2008, the FTSE 100 index is trying to hold its nerve around the 6,000 mark. All this has happened despite negative sentiment surrounding both house builders and banks, along with further sub-prime write-downs by financial institutions, proving how resilient the stock market can be.
In the first quarter of 2008, the UK economy grew by 0.4%, dragging the annual growth rate down to 2.5%, below the expected 2.6%. Interest rate cuts and the £50bn liquidity injection into the banking system by the Bank of England seem to be preventing the UK economy from going into a recession.
Opinion in the US is still divided over the question of whether the economy is in or heading toward a recession or not, or even if it is now recovering! Even the old adage of America sneezing and all other economies catching a cold has been questioned, as the emergence of the BRIC (Brazil, Russia, India and China) economies dilutes the influence of the US.
The Dow Jones and Nasdaq indices have both recovered well since March, despite poor housing market data and weak consumer confidence. At the time of writing (May 2008) oil prices continue to reach record highs, with some experts predicting it could reach $200 a barrel in the next 6-12 months. As the summer driving season begins in earnest, demand for oil could have a negative impact on inflation and consumer spending.
Most Asian markets mirror the positive trend in equities with China’s Shanghai Index posting gains of 14.96% in the last week of April, after a reduction in stamp duty levied on share trading. Japan, however, is still experiencing volatility with market movements of +/- 2% commonplace.
The financial sector continues to be a drag on European markets as fears of further write-downs by major financial institutions persist.
The European Central Bank will need to see more weak economic news and lower inflationary pressures before it starts to think about stimulating the euro zone economies with interest rate cuts.
Moving forward, investors are seeking out more opportunities and sentiment is starting to look more positive. There will still be challenges ahead, but it should prove to be an interesting year.
This article appears in our client bulletin, published Summer 2008.
