The FTSE-100 – Contrary Behaviour?


Given the precarious state of the UK economy, it was curious that the FTSE-100 recently registered increases over 11 successive days of trading: this run ended last Tuesday.

Since the founding of the FTSE-100 in 1984, this was the only the third time that there has been such a sustained upward performance.

To be sure, trading volumes were low. And, in market jargon, this rise may well have been a case of a ‘dead cat bounce’, a trend that is typical after prolonged losses.

Prospects for the real economy remain grim as recession digs in. Whilst there is some evidence that the worst is past, many market watchers argue that this recession – caused essentially by the heavy over-valuation of financial and housing assets which gave rise to the credit crisis – is different.

Moreover, the UK’s public finances are in a dreadful state: this year, no less than £220 billion of gilts are due to be issued to fund the massive public debt.

At the corporate level, though, there are some grounds for optimism. Recent results and trading statements, with a few exceptions, have been reassuring.

And even the massive slump in profits for both BP and Shell were readily absorbed by the market which recognized that plunging oil prices were bound to cut their returns.

One persistent theme has been the pension deficit issue, which continues to do dreadful damage to the share price ratings of British Telecom and British Airways amongst others.

Where will the FTSE-100 go from here? Inevitably, opinions vary.

Many experienced market professionals remain pessimistic, given the shocking state of the public finances and the expectation of higher interest rates. 

A serious failure with a forthcoming gilt auction would also alarm the market. Furthermore, irrespective of the outcome of the next General Election, substantial public expenditure cuts look inevitable.

Worrying times.