AFTER making good progress earlier in the year, the London stock market looks set to come under increasing pressure in the coming months. Even now the FTSE 100 is only trading roughly where it started 2014 following a 14 per cent rise in 2013 and anticipation earlier this year of a broadening British economic recovery.
Two things have spoilt the party-ish atmosphere. The white smoke from the Bank of England is that the first interest rate rise is likely sooner than financial markets expect – to be presumably followed by further baby-step rises; and the escalating violence in Iraq.
The result has been surges in the value of sterling and oil prices, both not good for business earnings, in particular exporters, and that will cloud investor sentiment. Just because something is predictable, however, does not make it avoidable.
Charlie Bean, the outgoing Bank deputy governor, is right to say that the first rise in interest rates from historic lows would be welcome as a sign the economy is back to normal after its chronic attenuation.
But the prospect of an early rise, certainly by the late autumn, has sent the pound through the $1.70 mark, where it was last way back in 2009. In short, markets have taken Bean’s boss, Mark Carney, at his word last week that the balance is swinging to a monetary tightening.
Meanwhile, the emergence of powerful and violent jihadist action in Iraq could send oil prices rocketing further. Prices have already spiked $5 a barrel to nine-month highs of $113 since Sunni militants Isis made dramatic inroads.
All eyes now are on the minutes of the June Bank monetary policy committee (MPC) meeting to be published tomorrow. None of the nine members of the committee has voted for a rate rise since July 2011, and if even one member has this time, expect it to support sterling at these higher levels.
If two or more members have voted for an increase I expect the pound to rise further. The headwinds now facing equities are a mixture of the domestic and geo-political.
And both factors – the pressure to lift UK rates and oil price volatility on the back of a pretty definitively “Mission Unaccomplished”Iraq – appear to have legs. I don’t think we are in blip territory.
Wizz-bang for flotation hopes of budget airline
WIZZ Air’s decision to pull its London float is more to do with turbulence in the airline industry than in the general stock market.
The budget airline has been a victim of the timing of profit warnings from Lufthansa and Aer Lingus, which have destabilised stocks in the sector.
The prudence is sensible. Wizz Air should await clearer skies for a public listing.