European Markets and Lower Interest Rates
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Trading Features / Strategies from Simon Denham of Capital Spreads.
A mishmash of numbers out yesterday and today will leave investors rather fogged as to what is actually happening on the high street in the UK and on the global economy as a whole.
Sainsburys showed stronger than expected sales growth (and actually reasonably good numbers in any environment) whilst Topps Tiles and Kingfisher are demonstrating how difficult it is in the DIY and construction sector. Kingfisher's reaction to a mere 2.8% drop in profits by slashing the divvy by 50% will not have investors cheering them on. Aside from the strong growth in Europe the company appears to have almost ground to a halt.
Speculation that the US will now confirm that it is contracting will also have investors a little on the defensive. That will probably continue the paralysis in the credit markets. Remember the definition of a recession is actually two consecutive quarters of negative (sic) growth. In this scenario the temptation to just sit on the side lines is almost overpowering but there are always those looking to pick up good value equity when the moment appears right. I have, personally, been dipping a toe in the water and acquiring some small stakes in companies that look too oversold but I have to admit it is nervous stuff.
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Over in Europe the picture is even more confused as business leaders in Germany and France express the greatest optimism for almost a decade whilst Italy, Spain and Ireland squeak under the twin weight of interest rate and strong currency pressure. The ECB has signaled that, far from cutting rates, their inclination is actually to put them up, a prospect which may well lead to some strong words from the Club Med group. The idea that some of the major partners of the European experiment may feel pressured to pull out of the whole agreement may well start to gain credence, especially with the Italian elections soon to be fought and the country continuing to fall behind the remainder of the major players.
Growth across Euroland seems very segmented and the strong currency is creating a vicious circle in the countries that really need a bit of easing. With so little real mobility of labour across Europe (it is difficult for your average Spaniard to up sticks for a job in Germany) differences in growth patterns may well spiral out of control.
Growth areas could benefit from the marginally 'lower' interest rates whilst the slower European growth areas continue to struggle under 'higher' interest rates and currency caused by the stronger areas.
The Bank of England is striving to steer a path somewhere in the middle of these two scenarios but by delaying cuts whilst continually hinting at them will do no favours to the overall value of Sterling. Markets will generally buy the rumour and sell the fact. If we are to have rate cuts, better to get them in now rather than continually promise jam tomorrow.
The above comments do not constitute investment advice and neither Capital Spreads nor Clean Financial accept any responsibility for any use that may be made of them.
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Risk Warning: Spread betting carries a high level of risk to your capital. You may lose more than your initial investment. It may not be suitable for all investors. Only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved and seek independent financial advice where necessary.
Article provided / approved by Capital Spreads which is a trading name of London Capital Group Ltd which is authorised and regulated by the Financial Services Authority (FSA), FSA Register number 182110.
'European Markets and Lower Interest Rates' edited by SD, updated 27-Mar-08
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