The FTSE 100 and the Credit Crunch
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Trading Features / Strategies from Simon Denham of Capital Spreads.
Markets look to be opening slightly on the side of the angels this morning which might come as something of a surprise to many. The strength of the equity markets in recent weeks would appear to fly in the face of ‘perceived’ wisdom as the effects of the credit crunch continue to filter through into the wider market. An outside observer might wonder what has changed to make us all feel so much better than we did in the middle of March. The obvious answer is that US rates have just about halved, a swathe of investment banks have gone cap in hand to their stockholders and the various central banks have cobbled together a sort of ‘rescue package’ which they hope will add a bit of oil to the credit markets.
Oddly enough whilst we are all congratulating ourselves at having avoided to worst the actual share prices of the various banks, at whom all of this liquidity injection has been aimed, has been less than obliging. Most are still within 10% of their lows. Obviously the big investors are not, yet, convinced. Personal debt levels continue to increase month on month and it must be worrying that consumers are beginning to run on empty just as inflation starts to cut into available spending money.
Today sees the Treasury releasing the April RPI inflation numbers. With sterling weakening and commodities prices going walkabout during April, the omens cannot exactly be optimistic. The decision by the Bank of England to hold rates last week must have been made with a nod in the direction of this figure so we cannot exactly expect good news. The jury is still out as to whether the food and fuel price squeeze will drift into the underlying numbers or whether producers and retailers will continue to absorb the majority of the increases and slice into margins. Either answer would appear to be bad news for UK centric equities and, with the MPC taking the high road, there is unlikely to be much help for heavily indebted firms from lower borrowing costs.
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HSBC is expected to deliver, if not an upbeat trading statement, at least a cautiously optimistic one statement. Nevertheless it must be remembered that the bank is very much Eastward focused rather than Westward (notwithstanding the debacle over their recent US foray) and can look with rather more equanimity at the travails of its European and US rivals.
Oil is the word on everyone’s lips at the moment with economists trying to add in the braking effects of the move from $90 to the current crude oil price of $126. It is very difficult to be anything other than majorly pessimistic as the US was rumoured to be in recession and Europe and the UK slowing sharply even before the recent price spike. What, you might quite reasonably ask, will be the overall economic impact of this sudden (and quite unexpected) new drain on cash resources? Again, we might reasonably suggest, it appears that the equity markets have completely ignored the consequences of
a) The inflationary aspect (higher rates), and
b) The squeeze on margins
Last week, Carlsberg gave a much worse than expected trading statement and one of the main reasons was the increased costs of Transport. If this is a general condition then I fear that the optimism of recent weeks will grind to a halt quite soon.
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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'The FTSE 100 and the Credit Crunch' edited by SD, updated 12-May-08
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