|Bennie the Banker has arrived. No, this isn’t the figment of a fertile imagination influenced by too many repeats of The Godfather. Ben Bernanke is the new Chairman of the Federal Reserve, from February 2006. The appointment of Alan Greenspan was soon followed by the 1987 “crash”, his response to which was superb. Bennie will also take over midst interesting times, and will likely be tested early on. Will he continue increasing interest rates, where monthly increases from now until next February seem likely, putting not just the US and global economies under pressure, but also a wide range of asset prices?
As anticipated last month, gold and oil are already coming off their highs. And in these seasonally febrile times the almost hysterical media coverage of bird flu (anticipated in our September commentary) can only serve to accentuate the cracks in confidence and the markets that are already evident.
Back in July we set out some stockmarket sign-posts ahead of the typical Autumn wobbles, highlighting that 5400 on the FTSE 100 index could be a significant barrier to the bull run in place since March 2003 (when footsie was around 3300). So it transpired, as the index held above 5400 for a couple of weeks in September, but could manage no more than that. If this weakness continues the first line of support is 4800. If it develops into a full-blooded retracement of the 2003-2005 bull run, 4800 is unlikely to hold, with more solid support around 4400. Don’t be panicked if the market takes a few weeks or months to work its way down to these lower levels. After the bull run since March 2003, this is exactly what should be expected, a healthy retracement, and it will lay the foundation for the next leg of the bull market.
On the other hand, if the FTSE 100 index gets back over 5400, and holds there, the upward run that began in March 2003 is likely not yet over.
There are other indicators in the UK that we should keep an eye on. According to Hometrack house prices have been falling for the last 16 months, not by large amounts but enough to impact on the economy at large. County Court judgements against defaulting homeowners rose 60% over the last quarter, compared to the same quarter last year. This level of defaults is still very low compared to the 1990s, but if the trend continues it will not help waning consumer confidence. In the past, it has more typically been sharply rising interest rates or unemployment that have triggered downturns, so the prevailing apparent link between economic growth, consumer confidence, and house prices is interesting territory for economists.