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Global Economies and markets

OAfter a bit of a wobble for the last newsletter the markets firmed up further during July and went positively electric when they posted one of the longest rallies in history in the latter part of the month. I talked of sideways trends last month but the strong rally obliterated that slight weakness. It is considered that investors were holding a lot of cash and wanted to keep in with the rally besides not wishing to be caught without some of the remaining bargains. In addition bonds weakened as rates went up. Financials and mining stocks certainly seemed popular as the BRIC economies raised the flag again for a commodity rise. At the same time banks and other financials started to come round with increases in capital and earnings but precious little lending taking place. Volumes were low though and a downturn could be just around the corner.

Week ending 8 August saw the FTSE up again and posting a 10 month high. So the broad rally continues with China and other Asian markets delivering strong gains. The FTSE was only slightly shaken by the latest clutch of bank reports which saw a slide on Friday with RBS holding the wooden spoon.

I wonder whether this rally is on it’s last legs because commodities have faded this week and the Baltic dry index slipped back in early July, rallied in the latter weeks before crumbling in August. As I write it is down below 3000 from above 4000 a month ago. Apparently Chinese restocking has petered out. Of course investors who took the plunge in March will have very healthy gains which they may decide to take at any time and that tipping point may determine the next trend.

Conflicting signals from the US and Europe are making forecasting very difficult. First you receive announcements about large companies exceeding analyst views and next minute it’s a dire prediction on employment trends or repossessions and bad debts levels.

Dominic Picarda in the FT suggests that the share rally is disguising the long term bear market. Also says the S&P 500 is overbought after a 50% gain since March lows. At it’s lowest point that index still traded on 13 times cyclically adjusted earnings which is nowhere near the single digit multiples one could expect. Hang on to your hats we may still be in for a very rough ride especially if the short term movements continue upward.

UK Economy & Politics The Bank of England surprised analysts this week when it announced a further stage in quantitative easing. Instead of £25bn it pushed out £50bn. This smacked of a bit of panic and markets did not take it too kindly. It seems the Bank is still worried about many aspects of the UK economy.

Commodities

During July the gold price has been strong and surmounted $950 but it gyrates with the relative strength of the dollar as well as supply and demand constraints. Brent oil reached a high for the year of $76 but it may not be long before it to goes into retreat with another low which could be as near $50 or even lower.

Currencies

The level of the US dollar is weakening against major currencies, which seems to be the wish of the new US administration. Where this will lead is debatable but one might expect the next major market moves to occur when the fiscal stimulus is withdrawn or wound down, especially in the US

UK Stocks

New highs have been on a rising trend for a few weeks. At 33 Highs outnumbered lows 5 to 1 Sectoral divergence is still quite apparent. Changes are as follows. Industrial metals (a very small number of companies) are up 412% since New Years Day. No other sectors come close although 20 sectors are up more than 25%. Interestingly, the FTSE100 is now positive over 7 months (+6.71%). What seems to be dominating markets is movements in shares where a refinancing has occurred or where they are recovering from a very low point e.g. Banking shares. The FTSE small cap and FTSE 250 are trouncing all the other indices.

Mobius investments

Mobius club are in recess during August. No doubt any members with half an eye on the stock market will be pleased at progress of our individual shares. At the last meeting in mid-July all shares were clear of their stop loss levels so hopefully we will not have to resort to drastic action in the next period especially while some of our members are away on their jollies. At the meeting it was pleasing to report that Persimmon was showing the best profit and it has risen further since then. Several of our investments have also paid some excellent dividends which justifies our choice of several value stocks.

Martin Longman - Acknowledgements to Daily Telegraph and FT.