A reversal of fortune in the mid-year report

Mid June is a good time to reflect on progress at mid-year. What is striking is that first quarter projections for many markets, areas or issues have proved wrong or off course, and many investors are holding opinions exactly opposite to their earlier views.

Less than a month ago, markets were bit by a 50 basis point hike of the US Fed Funds rate, and investors were fully expecting more punishment when the US Federal Open Market Committee, met again at the end of June. But the data coming out of the US has suggested the economy is slowing rapidly, and there may be no need for further rises.

Arguably, the UK is leading even the US in the monetary cycle. Only recently the futures markets were discounting rates of 7.25% or even 7.5% three months out. But now investors are talking about rates peaking where they are now or perhaps moving only slightly higher by the end of the year.

In Europe, the sharper than expected hike by the European Central Bank has helped monetary convergence between the eurozone, the US and UK. The move was clearly more a kiss of life for the euro than an inflation-buster, but it had the desired effect. The currency promptly awoke from its 500-day slumber, and rose like a Phoenix as if nothing had happened.

However, no-one wants that bird to soar away just yet, thank you. Economic growth in the key economies of the eurozone is just picking up, particularly in Germany, and a couple of heavy handed rate rises could snuff out recovery before it gets going. The UK also has much to thank the euro for. Its resurgence is helping ground the overvalued pound and is adding to investors' positive perception of the UK, because of the high level of trade and business with the eurozone.

Europe, in economics as in football, has an astonishing capacity to make a surprise comeback. Wasn't it only a few weeks ago that some anonymously smug and vulgar trader described the euro as a "toilet currency"? To Europeans, the same earnest condescension flavoured British comments on Portugal's football prowess. We seem to regularly underestimate our rivals.

The perennial British debate on whether and when to join the euro has also witnessed a marked shift in sentiment in recent weeks. While the euro was struggling, despite quite respectable stock market performances, there was no question of flourishing Britain linking up with floundering Euroland. Now, as all the euro indicators start pointing the right way, there is a feeling we might be about to miss out.

The political haranguing swirls around above the UK stock market, which many global investors actually rate their top pick at the moment. Valuations in both old and new economy stocks in the UK are improving, sterling has eased to a more comfortable level, and monetary policy appears to have headed off first the threat of inflation and then the fear of a hard landing.

But the onset of summer means liquidity is low and the market rumour mill goes into overdrive. After the roller coaster of the first quarter, many investors would welcome time to consider and consolidate. Ordinarily, the power cut that paralysed the City last week would have provoked tantrums among the trading classes: if they are not dealing, they die. But the phones slowed, the bars filled and the Square Mile chilled out. Euro 2000 has achieved something already.

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Send to