The report that the Prime Minister and the Chancellor have drawn up a timetable for a Euro referendu...
Tony Blair has repeatedly made clear that an examination of the 'five tests' will take place within the first two years of this parliament and that they will have to be met before a referendum is called.
The Treasury has predictably already gone out of its way to deny the suggestion that an accord has been reached. Given its fears of a slide in Sterling this is not altogether surprising.
Whether it also reflects Gordon Brown's greater caution on the subject is harder to gauge. Whatever, the foreign exchange markets have not placed a great deal of store by the report.
In truth, the more significant 'Euro' story this week was the reported comments of the chairman of the Confederation of British Industry, Nick Reilly, who speaking in a private capacity suggested that British business could cope with an exchange rate as high as DM3.10. What is particularly interesting is that he is also managing director of Vauxhall Motors. While exports of manufactured goods in general have proved remarkably resilient in the face of the strong Pound (rising by around 30 per cent over the past four years), the performance of car companies has been particularly poor; export volumes of cars are lower now than they were at the start of 1997.
If, and it is a big if, manufacturers believe that they can not just survive but actually thrive at this sort of exchange rate then this has potential to change the shape of the 'Euro' debate.
One of the big obstacles to joining the single currency is the perception that Sterling will have to fall substantially to reach a competitive level; Eddie George has indicated that this would put 'strong upward pressure on the domestic rate of inflation' which, in turn, could jeopardise the highly prized goal of economic stability.
Should this not be the case, then the `economic convergence' test, which is by far the most important of the five, becomes a much closer call.
Our suspicion is that, with manufacturing output collapsing and profitability at its lowest level since the first quarter of 1992, the acceptability of a DM3.10 exchange rate remains very much a minority view. However, it could also be a recognition by manufacturers that their desire for currency stability will only come at a price.
Where the big four, go, so goes the FTSE 100. Oil and Gas (16 per cent of the market capitalization), Pharmaceuticals (15 percent), Telecoms (12 per cent - though nearer 30 percent at the peak of the TMT bubble) and Banks (20 per cent) failed to fire until late in the week. The result was that the FTSE100 fell to a new post bubble low.
Mind you, the UK was not alone in reaching new lows for the year. The same happened in the Euro zone and, in the case of Japan, the Nikkei Dow also went to a new post bubble (that is post 1989) low. The US equity market traded down but, thus far, it has managed to hold on to at least half of the gain achieved since the early April low.
Technically, the US equity market looks set to rebound again but there is major resistance for the Dow Jones around the 10,500 level and, beyond that, at around 10,900. Given that the market is oversold and that further interest rate cuts are expected, the prospect is that the first of the two resistance levels will be overcome.
As for why the FTSE 100 fell to new lows for the year the past week was filled with nothing but discouraging news.
The profit warning from Invensys indicated in no uncertain terms how the effects of the global slowdown are spreading to the old economy. However, much of the damage came after Abbey National announced that it would provision for more bad debts. This is an area of risk for the banking sector generally and the concern was enough to push the sector down. Considering that it represents some 20 per cent of the FTSE 100, that by itself was also enough to send the market to this week's new low for the year.
Where to from here? Up, if Wall Street rallies. The pertinent point is that the UK equity market is very oversold. This extends to the FTSE 250 as well as to the FTSE SmallCap Index.
The UK equity market is also attractively valued. The gilt-equity earnings yield ratio is at the low end of its historical range.
As suggested at the outset much depends on whether the market fires on all fours. Pharmaceuticals may lag in the rebound simply by virtue of their recent outperformance. Oil & Gas should continue to thrive on the prospect of more stable oil prices now that OPEC intends to cut output by one million barrels daily. However, Telecoms are still expensive.
As for the Banks their rating has improved relative to the market but the concern is with credit quality. Having said all this, so long as the big four move up, whatever the pace, then happy days will be here again.
Mike Lenhoff and Simon Rubinsohn are market analysts at Gerrards Ltd.
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