Posts Tagged ‘FTSE 100 Index’

There have been times in the past when the markets got it into their collective head that it was time for buying, even though there were good reasons to think it was really a time for panicking. Take 2007: in that year, the Dow Jones passed a new all-time high, and the FTSE 100 came close to passing its all-time high.

These promising stock market peaks occurred after the run on Northern Rock; after the phrase ‘credit crunch’ crept into popular parlance. Back then the markets were in the mood for interpreting all news – good or bad – as if it was a reason to buy. Their logic went like this: if the news was bad that meant interest rates might fall, so buy; if the news was good, they bought because, well… because the news was good.

There have been times since when it felt a bit like that all over again, but this year, it has been rather odd.

The Dow Jones began 2013 with a score of 13,104, peaked at 15,409 on May 28 (the previous all-time high was 14,164 set in 2007). The index then fell back, falling to under 15,000 and at the time of writing stands at 15,135.

For the FTSE 100 things were a lot more volatile. The index began 2013 with a reading of 5,897, peaked on May 22 with a reading of 6,804 (against an all-time high of 6,930 set on December 30 1999), before falling back to 6,029 on June 24, and at the time of writing is at 15,135.

In Japan things have been more even extreme. With the Nikkei 225 rising from 10,401 on January 1, to 15,627 on May 22 and then 12,834 a week or so ago.

It is not hard to find an explanation but it is harder to find one that makes sense.

Because the news out of the US has been so good, the Fed is now talking about reining-in QE, and upping interest rates in 2015.

The markets do not like it.

The jury is out on how much QE has had to do with equities surging so high. QE has driven asset prices upwards, but then valuations to earnings, especially in the UK, do not look excessive.

One of the worries is that while the US economy may boom, the more indebted regions of the world simply cannot afford higher interest rates.

The Bank of England and the ECB recently went out of their way to emphasise that they have no plans to tighten monetary policy and that what they do is not dictated by the Fed.

But, supposing interest rates rise in the US, and money therefore flows into the US from the rest of the world. In response and to stop currencies falling too sharply against the dollar, we may see other central banks up rates. To make matters worse, the Central Bank in China seems to be tightening monetary policy. This may be a good thing for China, and indeed for the global economy in the long term, but for much of the world the timing is not good.

Some have had a nasty attack of déjà vu. When the Fed upped rates in 2004, one eventual consequence was money flooding out of South East Asia into the US, which led to the Asian crisis of 1997.

But then again there are differences this time. In Asia, especially among the so-called ASEAN countries of Malaysia, Indonesia, the Philippines and Thailand, internal savings are much higher and the countries are less reliant on overseas credit.

Across the world some countries are more vulnerable than others. Brazil may be the most vulnerable of the BRICS; Turkey seems to have high exposure, and worryingly – given the political situation – so does Egypt.

Many countries in emerging Europe seem exposed, as do the PIIGs – of course, and so do Sweden and the Netherlands. Household debt and house prices are high in Canada and Australia, and then there is the UK. See: Is that a sword of Damocles hanging over the UK housing market? 

Interest rates seem set to rise in the US, and for other reasons they may rise worldwide. See: The Great Reset 

This is down to good news, and is largely positive, but for some countries, companies and people, the news is not so good – not at all.

© Investment & Business News 2013

Yesterday was a day for selling. But it is noticeable that while gold fell to a 34 month low, and US government bonds to a 22 month low, on the whole equities merely fell to a one month low.

At the time of writing gold is trading at $1,295. To put that price in context, back in September last year it was going for $1,778. The last time it was so cheap was September 2010.

Some say they are puzzled by the falls, but gold really is one of those riddles wrapped in an enigma – a golden enigma, in fact.

Gold rose in the aftermath of the finance crisis, and then again in the aftermath of the aftermath, because many feared a major meltdown as countries raced to devalue, and it was being said that QE created the danger of hyperinflation.

Talk of QE creating hyperinflation always was nonsense. As this column has said before, what matters is the broad money supply, and at a time when banks didn’t want to lend, while households were trying to repair their balance sheets, there was little chance of the broad money supply rising significantly, whatever central banks did.

Now the US economy is showing signs of real recovery, and the Fed chairman Ben Bernanke has suggested QE will be easing up soon and interest rates are likely to rise in 2015, everything looks different.

When real interest rates are negative, the fact that gold offers no yield is a trivial concern. But now that rates seem set to rise, that lack of yield seems to matter a great deal.

As for bonds, the yield on US 10 year treasuries has risen from 1.38 per cent last July to 2.39 per cent at the time of writing.

Markets are moving away from so-called safe harbour assets. During the era of QE, many feared currency wars, as loose monetary policy pushed down on the dollar, and other countries tried to devalue so as not to lose their competitive edge. Now the era of loosening is approaching an end; currency wars have moved to currency peace, and the new fear is that some currencies are in danger of becoming too weak.

As for equities, they too have fallen sharply, but just remember that the falls are not as drastic as recent rises. The FTSE 100 started 2013 on 5,898, rose to 6,840 last month, going close to the all-time high set in 1999, before falling to 6,159 last night.

Look at how equities have fallen since the end of May, and the sell-off looks drastic. Look at equities this year, and the market still looks attractive.

Above all, just remember that it is good news on the US economy that lies behind markets selling.

As rates rise, there will be losers, and for a while the markets may even punish those with strong fundamentals, but a resurgent US consumer is a good thing, and once the dust has settled we will see plenty of winners. But watch the Eurozone, emerging Europe, and maybe Brazil, for the real woe.

© Investment & Business News 2013

In Japan the Nikkei 225 had risen from 8,515 back in October to 15,627 earlier this week. Yesterday the index lost 7.5 per cent, falling back to 14,483.

In the US, the Dow rose from 12,542 last November, to 15,387 earlier this week.

In the UK the FTSE 100 rose from 5,605 last November to 6,840 earlier this week, yesterday it lost 2 per cent.

So this begs the question: why?

News that the Fed may be set to bring its policy of QE to an end later this year did not help, see Fed at sixes and sevens.

News that the latest flash composite PMI measuring Chinese services and manufacturing has fallen below the critical 50 no-change mark for the first time since last October, did not help much either.

See: China stumbles, Eurozone limps

But then again, maybe the real catalyst for yesterday falls is that after a period when shares have risen sharply these things happen. What goes up eventually comes down.

So yes, yesterday the FTSE 100 lost 2 per cent but, no its falls were not even enough to reverse the overall gains seen this week.

Yes the Nikkei 225 lost 7.5 per cent, but its closing price yesterday was still up on its level seen just 10 days ago.

And the Dow did not actually fall that much at all yesterday – down by just 0.08 per cent on Thursday.

Here are a couple of observations and then a warning.

Observation number one: the all-time high of 6930 set for the FTSE 100 in December 1999 remains elusive. Back in 2007, the index went close, moving within 200 points before crashing. This week the index went within 90 points before yesterday’s mini crash. Will the index fail to pass that level yet again in this cycle, before a sense of realism descends on the markets, or was yesterday’s fall just a blip on the steady march to new ground?

Observation number two relates to the news out of Japan, which is less rosy. The markets have gone Shinzo Abe mad. Abeonomics has done for markets what LSD did for hippies during the ‘60s, yet the feeling that the markets have gone too far, are a tad too euphoric, won’t go away.

What they call the cyclically adjusted pe – or the CAPE – which is to say stock market valuations as a proportion of average earnings over the previous ten years, was 28 for the Nikkei 225 before yesterday’s falls. To put that in context, last autumn the CAPE for the Nikkei 225 was just 18. For the US S&P 500, the CAPE is currently around 24. The US average CAPE since 1900 has been 15. The average for the Nikkei 225 since 1985 was 40.

But the US CAPE from 1900 probably understates reality, because earnings growth during the 20th century was rapid. The average CAPE for Japan probably overstates reality, because it was distorted by the exceptional bull run of the 1980s and 1990s.

Earlier this week, Capital Economics forecast that the Nikkei 225 would lose 15 per cent over the remainder of this year. Yesterday it lost half this amount in just one day.

Of more concern is that the yields on Japanese government bonds have been rising of late, and that is despite all the new QE we keep hearing about.

And that brings us to the warning.

There are bubbles in the making: in fact four distinct bubbles come to mind.

 © Investment & Business News 2013

With the FTSE 100 now into the mid-6700s, it is in territory not seen since the last century. Indeed it is only 200 points off passing its all-time record set in December 1999.

But can it last?

There is clearly a disconnection between the FTSE 100 and the UK economy, but then again many of the companies listed on the UK’s headline stock exchange index barely trade in the UK at all. Many are global in their reach, and thus the correlation may be between the FTSE 100 and the global economy.

Look at valuations, the FTSE 100 does not look especially high. The FTSE 100 peaked at 6930 in December 1999. Its current cyclically adjusted pe is around 12, while the average since 1975 is just under 14.

In the US it is a different story. With the cyclically adjusted PE being around 24 compared to a historical average of 15 since 1900.

Of course, if things got nasty in the Eurozone again – and they might – then markets across the world will look dangerously exposed.

The big question mark relates to QE, however.

No one really knows the extent to which QE explains stock market rises.

If QE were to be reversed, if inflation was to pick-up – for example thanks to rises in wages in China – then things may look very different. A fuller analysis will be published later this week.

© Investment & Business News 2013

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When you read this, the story may be even more positive. But at the time of writing the FTSE 100 is just half of one per cent shy of a millennium high. In other words, it is just one day’s worth of modest rises from passing the level it last reached back in 2007, before the economy went into a nose dive. The index is also just 3.5 per cent short of passing the all-time high set on December 30 1999.

If – and it’s a big if – stock markets are a good gauge of the wider economy, and if their value is reflective of the underlying strength of the economy, then that may provide reason to celebrate.

Here is another indicator for you: house prices. Okay, view this next statement with a large pinch of sodium chloride, but one key indicator may be pointing not only to recovery in the UK housing market, but in the economy too.

And finally, there is hard data. That is not half bad either – actually, it is a little bit bad, but it is a good deal better than it was.

Here are a series of articles which leave just one question: Is the UK finally on the mend?

FTSE 100 moves to within an inch of passing millennium high 

Are the stock markets set to crash? 

Japan’s miracle cure has been tried before in Britain – and it worked 

Economic recovery says Bank of England inflation report.

UK wages fall in the year to March 

© Investment & Business News 2013

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In the UK, as this piece shows (see: Is the UK housing market poised for recovery, and is that good or bad news?), there is evidence to suggest that UK house prices are in strong recovery mode. It is quite curious. The UK economy has suffered its worst downturn ever recorded. The FTSE 100 still languishes some 586 points below its all-time high set on December 30 1999 and some 377 points off the century high set in 2007.

The asking prices of average UK homes may be approaching an all-time high, but neither stock markets nor the economy are close to replicating that feat.

In contrast, the US housing market suffered one mother of a crash in 2006/07/08. It does appear the market has hit bottom, and is now in slow recovery mode. But that is the best we can say. US house prices are nowhere near what they were at their peak, and it will probably take years before they are.

At the time of writing (7.30 GMT 16 April) however, the Dow – even after yesterday’s falls – sits 435 points above its 2007 peak, a level that was its all-time high until a few week ago. The index is 11722 above its January 2000 high, which for much of the noughties was its all-time high.

So let’s run that past you again. The FTSE 100 peaked at the end of 1999; the Dow a couple of weeks later. At the time of writing, the FTSE 100 is 8.4 per cent below its 1999 level, while the Dow is 24.5 per cent up on its 2000 high. House prices, on the other hand, are approaching their pre-recession high in the UK, but are way below peak in the US. GDP in the UK is languishing at almost 3 per cent below the prerecession peak. GDP in the US surged past the pre-recession peak a couple of years ago.

The UK’s strategy may have won friends with a property obsessed electorate. The US experience instead has just created more production.

The US model may well create more sustainable growth. But the UK model creates votes in elections. Mr Osborne may try to present the veneer of a man making tough, unpopular but necessary decisions, which will create long term benefits. In reality, he is bribing the electorate with the promise of rising house prices, and in the process putting short term and transient benefits before long term resilience.

©2013 Investment and Business News.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here

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It was another record breaking week for markets in the US, with the Dow and S&P 500 hitting all-time highs and finishing the week down by a fraction from the peak. In fact, the Dow did end last week at 14865, up 2 per cent on the week, and up 13 per cent this year.

The FTSE 100 finished last week at 6348, also up 2 per cent on the week and by 8 per cent this year.

In Germany the DAX has seen more modest gains, up 1 per cent last week, and by 2 per cent this year.

In Japan, in contrast, the Nikkei 225 rose by 5 per cent last week and is up 30 per cent this year.

Markets in Hong Kong and China fell last week, and are down so far this year.

You can see why markets in China and Germany have not done quite so well. But why so much exuberance in the US, the UK and Japan?

The markets seem convinced that Abeonomics is going to work; that at last Japan is going to implement QE big time, which is seen as being the policy the economy has really needed over the last two decades. But don’t forget that Japan’s savings ratio has fallen sharply in recent years anyway. This fact alone may have far more impact on Japan’s economy over the next decade than QE.

And why has Japan’s savings ratio fallen? Surely it is because much of its population are now retired and have no choice but to draw down savings. I’m not sure that is a good thing.

As for the US, the economic data is not so good. There has to be a big question mark over the sustainability of recent rises in US markets.

Ditto, but even more so for the UK.

Others have justified market rises by pointing to good news out of China. But that run of good news may be over, see: China sees growth disappoint as India sees some promise

But the single biggest reason used to justify rises in the markets during the first few months of this year was that the Eurozone was past its worse. Mario Draghi’s promise to do whatever it takes to save the euro impressed the markets.

Right now as the Cypriot debacle rolls on, and unemployment across much of Europe hits terrifying levels, it looks very hard to justify such optimism.

Given this, why haven’t markets fallen back?

©2013 Investment and Business News.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here