AS THE first half of the year draws towards a close, the equity rally is running into resistance at levels close to those at which the year began.
The UK market traced a 20% collapse in the early months of 2009 and subsequently recovered – much ado about nothing in the end.
The current profit taking seems set to test the optimism that has driven the rally from March’s lows. Listlessness, rather than panic, is the mood but bear-mauled investors will watch to see whether buyers return after the correction, rather than the correction engendering further selling, as happened last year.
Given the improvement in incoming economic data, this looks most likely to be a pause while the news catches up with the greater optimism in the stock market, not a period when expectations are ratcheting downwards, driving prices down further.
On the positive side, the more cautious mood is allowing government bonds to rally, as premature expectations of rising interest rates cool off. This is a point of major sensitivity, given the risk of withering the young green shoots in the housing markets (or, in some cases, preventing germination). Not surprisingly, central bankers are prefacing their comments about the eventual need to remove the current extraordinary stimulus measures with reassurance that this is not imminent.
Aside from the interplay between gradually improving economic news and financial markets keen to move their focus from the recessionary here and now to the hope of a better 2010, the news has been dominated by renewed discussions over the regulation and capital strength of the banking sector. Happily, the circumstances are calmer than last winter, with the debate having moved on from "rescue" to equipping the sector to resume its normal activities.
Although the media are playing up the apparent differences between Chancellor Alistair Darling and Governor Mervyn King, who says more radical reform is needed, regulation is something that can be shaped at comparative leisure.
An outbreak of excessive risk-taking does not seem a major tactical hazard, since bank finance is both scarce and expensive, in a reaction against the sins of profligacy that prevailed before mid-2007.
More important are the positive comments from both about the economy stabilising and Mervyn King’s comments at London's Mansion House dinner last week that “stress tests to assess the viability of the banks are very different from tests of the capacity of the banking system to finance a recovery”.
This repeats a warning he gave last month that further bank equity issues may be needed, given recessionary gloom and the amount of bank lending previously undertake. The markets will probably remain open for private-sector funded rights issues as long as the money raised is to fund growth rather than plug balance sheet holes.
The difference from last winter is that, as Lloyds Banking Group has shown, the Government is no longer the only investor willing to put up cash to recapitalise the sector.
Andrew Bell,
Head of Research,
Rensburg Sheppards
BILL GLEESON: PAGE 8
