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May has turned to June and most major stockmarkets remain, to the observer, strong and steadily moving upwards. All well and good you might believe but at least in the UK interest rates might yet have a greater influence on the course of events within the next few months.

The Chinese stockmarket took a backward step last week with a 6.5% drop on Wednesday 30 May. Not the first time it has been pegged back in recent times and understandable perhaps when you take into account the astonishing rise of 245% since the start of 2006. Their government is busily introducing measures to reduce headlong expansion and it is difficult to forecast the unintended consequences of the various actions. They currently enjoy a 10% current account surplus and it is thought that an increase in it’s exchange rate along with other measures would even the situation somewhat without causing serious problems. However another joint solution to the imbalance is to increase state and personal consumption. Of course this is a new situation for China and problems must be tackled sensibly and carefully. The US, as a huge importer of Chinese goods is angry with the attitude of the Chinese government, seeing the managed exchange rate as unfair competition. It remains to be seen if China will heed US warnings. America has not been slow in the past to slap import controls on countries who they thought were engaging in dumping of goods.

UK interest rates are forecast to rise again soon and there is no peak in sight yet. Tim Congdon warns that inflation could easily top 5% and he blames the rising tide of money in circulation. At the same time a Fed board member re-iterated that inflation remained the big risk in the US, and in Europe the Central Bank is getting ready to raise rates further

Housing prices seem to be easing with a reduction in buy to let activity mainly caused by a squeeze on rental returns. However this step down in housing spending may not be enough to ease inflationary pressures. The bleak scenario I painted last month is still ready to play out and may not be far away. In the meantime many consumers and investors seem unperturbed and still in a spending frame of mind. Companies are also announcing bigger profits which at least help the private investor to feel insulated from any imminent problems.

Commodities prices were kept buoyant last week with stocks of most metals at very low levels. Only nickel was slightly weaker when steelmakers hinted they may produce more low nickel steel. Gasoline prices are at record pump levels in the UK and US but demand for it remains more or less unaffected. In the US they fell 3.9% over the week. Although petrol stocks have risen in several recent weeks, they are still lower than last year at this time and stocks are only being maintained by record levels of imports while refineries operate at 91.1% capacity.

Coming back to earth it is really pleasing to report that the Mobius club UV has risen this month as expected to almost 112. Further strengthening of our mechanical portfolios is undoubtedly the key factor behind this appreciation in value. Sad that we had to sell LogicaCMG (at a loss) which fell heavily on financial reports that were not very encouraging for the future. The SP has since recovered but the modest damage to our assets has been done.

The club has benefited particularly from our moves into Tanfield and Lavendon Group. Between those two stars and steadier winners like Hamworthy and UMECO the UV has found extra vigour.

At the end of last week (June1st) 205 new highs were noted against 52 new lows. I am pleased for my own sake that Standard Chartered Bank was amongst those who hit a new high as I also reported last month. The increase in number of stocks in our various portfolios has expanded our coverage of the general market giving us somewhat less concentration on certain sectors. This will hopefully stand us in good stead in future when harder times occur.

At the last club meeting we welcomed Roger the leading light of the Bulls, Bears and Chartists Investment Club. We were all impressed by his address which described the way that the BBC club made so much money. Their methods use a method of creating a portfolio using basic info obtained from Company Refs. In that respect our clubs are similar, only the filters differ. It was extremely interesting to hear about such a successful operation, and perhaps we will research and use a similar method to build an alternative portfolio to run alongside our own.

ML - Acknowledgements to Daily Telegraph and FT.