By Jack Haldane.
The UK stock market was pretty flat for the first half of the week. Traders were waiting for news of George Osborne’s Spending review. Expectations were probably already “baked into the price” of the market. That’s not surprising given the amount of “leaks” about the cuts over the past 5 months.
So by the end of Wednesday, when all the finer details had been disseminated around the newsrooms and City institutions, the stock market had hardly reacted at all. In fact, by 2.30pm on Wednesday the FTSE forgot about what was going on at home and turned its attention to the US.
Here, upbeat earnings reports from Boeing Co. and Yahoo! Inc helped the Dow Jones higher. That bullish tone was enhanced by continuing speculation that the Federal Reserve will flood the economy with more cash in a second round of quantitative easing. We’ll get back to the UK in a moment and look at some individual sector and stock stories you might like. But it’s worth staying “offshore” a little longer.
Other forces are having a clear impact on world markets and these affect you just as much as what’s happening in the City. The other big news in the last week came from the East. China’ central bank raised interest rates for the first time in three years. Why does that matter to you? Well, because it sends a signal to investors that China’s trying to slam the brakes on its fast growing economy... before it gets out of control.
The official explanation for the 25 basis point rate rise is that it is to keep a lid on inflation and to cool the overheating housing and stock markets. But there’s also a touch of showmanship here.
On 22 October the Finance Ministers and Central Bank Governors of the G20 members are having their latest annual meeting. As described on the G20 website, these get-togethers are held “to promote the financial stability of the world and to achieve a sustainable economic growth and development.”
China has already faced criticism for keeping its currency weak to benefit exporters. By raising rates it shows it’s prepared to allow the yuan to appreciate – perhaps a wise political move ahead of this meeting and the subsequent November G20 Summit in Seoul. Still, whatever the reason, a rate rise now and the chance that there will be further tightening ahead is seen as a threat to China’s growth. So when traders saw that, they sold the market hard.
On Tuesday, the Dow Jones ended down 161 points, having been more than 200 down at the day’s low. And it wasn’t just stocks that got hammered. This was a whole flight-from-risk scenario. Money poured out of risk assets like stocks, commodities and high-yielding currencies and into the ‘safety’ of the dollar. As far as the UK markets are concerned, the FTSE didn’t react quite so negatively to the China news. Perhaps investors here were preoccupied by the ConLib cuts story.
These will lead to the elimination of nearly 500,000 public-sector jobs in the next four years, the deepest UK budget cuts ever. There’s no doubt that these cuts are necessary to get us out of the deep hole the last government dug us into. But will they be enough? The Treasury is forecasting growth next year of 2.25%, taking into account the effect of the cuts. But the government is banking on you and me making up the spending shortfall to assist that growth.
And as KPMG points out, if consumers continue to save and pay down debt, like the government, rather than spending, the sums just aren’t going to add up. That could be bad news for the economy and ultimately bad news for the stock market. But as I mentioned earlier, a lot of the expectation of what the Spending Review would bring is already in the price. Look at the banking sector, for example.
The levy that Osborne is placing on bank’s balance sheets will raise billions in tax for the Treasury. And it will affect banks and the UK as a financial centre. But bank share in general didn’t react to the news that the levy would become permanent.
Price can often be misleading, but VectorVest’s Relative Timing (RT) indicator reveals the truth behind the trend, detecting even subtle changes in the price momentum of any security.
The price of the Domestic Banking Industry has been notching higher over the past few weeks, but a Bearish Divergence has developed with the RT moving the opposite direction. This tells us the short-term trend for this industry while still bullish, is rapidly losing steam. Until price starts to fall, confirming this divergence, this pattern will only serve as a warning to be wary for the moment and not be lured by rumours and speculation. So all in all, the long-await Spending Review has had little impact on the market so far. Whether that will change as investors start to figure out longer-term impacts on growth remains to be seen. But it seems that one sector in particular might be worth a closer look – that’s the recruitment and outplacement sector.
I’m thinking particularly of those companies that are involved in taking on newly redundant public sector employees, of which there will be plenty in the coming months.
City Insider - a weekly column from Galvan Research & Trading, the UKs leading CFD advisors. Galvanï¿½s research coverage focuses on Equities but also extends to Indices, Commodities and Currencies.
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Thu, 1st Jan - * A round-up of the biggest director deals today so far.