With the threat of global recession moving ever nearer, the Fed recently invigorated worldwide sto...
With the threat of global recession moving ever nearer, the Fed recently invigorated worldwide stock markets with an unexpected 50 basis point cut in interest rates.
The Bank of England is expected to follow the Fed's lead. The MPC meets to set interest rates on May 10 and the City already has a 25bp cut factored into forecasts.
What has happened in the UK and markets globally is a sharp and dramatic collapse in confidence. There has been little active buying of shares, and, fortunately, the markets did not witness panic selling.
The key driver for the UK market is the strength, or rather weakness of the US and the implications this has for the world economy. It is obvious that, overall, US companies will experience a fall in profits. Around 70% of corporate pre-announcements of results caused analysts to downgrade profits forecasts. It is still a matter for debate whether the US is, or will be, in recession.
The FTSE collapsed for two reasons. First, the US is in trouble; second, markets are substantially influenced by 'sentiment'. Fear and greed are two words commonly associated with dramatic price movements. Once the bears had taken control, sentiment turned sharply downwards.
Concerns for the future are impacting price performance. Having seen major US companies hit by downgrades, the assumption is that the trends influencing the US will eventually feed through to UK companies. It is often said but when America sneezes the rest of the world catches cold Ã an American recession is likely to cause a global recession.
A collapse in confidence with people fearing the worst tends to become a self-fulfilling expectation. Companies pull back investment plans and capital expenditure, and order book 'visibility' disappears. Orders are cut back and production falls - this is what is happening in the US and is why Greenspan had to act now.
On the face of it, the UK economy remains benign: interest rates continue to fall; inflation remains under control; unemployment is at its lowest for a generation and most companies are reporting profits growth. Although the outbreak of foot and mouth disease will have an impact on the economy Ã not just on the agricultural sectors but on the likes of tourism Ã a US recession would have greater influence on UK standard of living and GDP.
The market is now debating whether the worst has passed? The US purchasing managers survey rose in March and there has been a strong revival in consumer confidence. The Fed's action will undoubtedly boost short-term sentiment. All eyes remain on the US.
Overall, UK equities performance takes its lead increasingly from what happens to the US economy. The trading outlook for companies remains uncertain and market confidence is fragile.
Kenneth Wood, UK equity team at Abbey National Asset Managers
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