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Market commentary February 2008

By February 7, 2008No Comments

NB If you have not yet requested the latest TopFunds Guide, do email back. Similarly if you need ISA applications (or extra applications) for this tax year.

A horrible start to 2008 for world stockmarkets generated wall to wall hysterical media reporting by the week beginning 21st January. Yet by the end of that week the FTSE 100 index was down by just 31 points.

It is important at such times not to get sucked into the maelstrom created by headlines generated by competing 24-hour-a-day media outlets. It isn’t easy, and it helps if you have a road-map to ease you through these periods, and take advantage of them if at all possible.

Our road map (December and January issues) had an optimistic backdrop, while anticipating falls to 5800 or 5500 before a base was built for new market highs, fuelled by lower interest rates and global money flooding into London. We have now had all of that squeezed into a very exciting January, but, of course, for the new market high. Is the latter still a realistic possibility any time soon? Yes, but there are caveats.

U.S. interest rate cuts are arguably much more significant for the FTSE 100 index than UK rate cuts, which is just as well as the governor of the Bank of England, Mervyn “hair shirt” King, only hesitatingly re-appointed by the Government in the last week, appears to believe that little or nothing is an adequate response to unfolding events.

In contrast to the Bank of England, the U.S. authorities (with Government and Federal Reserve working together), are determined to introduce policy initiatives to shore-up both the economy generally and the banking system in particular, from bailing out those whose houses might otherwise be repossessed, to prodding and provoking solutions to the US bond insurer (monoline) crisis. It remains to be seen whether or to what extent such initiatives will be required in the UK, though don’t be surprised by action to loosen up the mortgage lending, where otherwise severe restrictions might have to be introduced by UK lenders.

Even if U.S. interest rates are more important for the larger global companies populating the FTSE 100 index, it will not be easy for the UK stockmarket to make marked progress, sooner rather than later, unless the Bank of England and UK Government move more aggressively to deal with the unfolding economic slowdown. This slowdown isn’t serious yet, but it could become so through the neglect of the authorities.

We could also do without the kind of economic statistics produced in the US last week which Anatole Kaletsky (The Times, and previously optimistic) said were the worst he had come across in over 30 years writing about economics.

We observe the progress of the UK stockmarket minute to minute every day, and we can clearly see the buyers prepared to buy on weakness. Nonetheless if there are more bouts of extreme nerves the index could certainly go lower than during the week beginning 21st January. In such a case the lower levels of support are towards 4600 on the FTSE 100 index.

Whether the UK stockmarket goes lower (before an enduring recovery), there are already clear areas of value both in stockmarkets and other asset classes, and we explore these in the latest TopFunds Guide.

Dennehy Wealth