How will the 1.5% cut in interest rates hit the markets?

Bets in the City / Simon Denham / 06 November 2008 / Leave a comment

Daily View - 6th November 2008

After all of the hullabaloo dies down the awful truth sinks in. We have just seen the election of yet another Lawyer into a position of power. It is one of the truths of the Labour Party that they have always been top heavy on the legal front but, whilst it is no doubt great on the debating floor to have an expert disputer on your side, not many would claim that members of the Legal Profession make for great business leaders. It has always appeared to me that their very training means they can see too many sides to every argument and this leads to paralysis.

Markets have turned back down again this morning with the FTSE called 130 points lower on the open down at 4400. The news yesterday on the Service Sector was pretty grim as the PMI index dropped to under 43 and with the weakness in the pound failing dismally to prop up manufacturing the outlook for UK plc is not exactly rosy. The service sector can be seen as a kind of parasite of itself in that a strong performance generates its own strength as money whirls around creating growth but the same effect can be seen in reverse. A slowdown has a multiplier effect way beyond the same impact in manufacturing. With so much of the UK economy now based on the performance of selling either your own working time (rather than the creation of a physical product) or of actual retail turnover any weakness in this area might turn out to be a great deal worse than economists are currently discounting. And this leads onto the machinations of the MPC. Having got the entire inflation/growth cycle of the last couple of years completely wrong (there is no other word for it) will they finally bite the bitter fruit of failure and cut rates to match our competitors or will they continue down the road of high sterling interest rates.

The US has had higher inflation and better growth numbers than the UK but their interest rates are at 1.5pc whilst ours are still well above 4pc. No wonder manufacturing finds it difficult to compete on our sceptred isle.

Tate & Lyle have come in with reasonable numbers after all the bad press. Yes, EPS has halved but turnover is robust at up 25pc and quite a few problems have been shown the door. The stock hasn't actually had too bad a year, it's fallen some 15pc, and these numbers show why investors have been willing to 'hold on'. Stock is expected to be higher on the open (even with the 130 point FTSE fall)

Man Group's number were also not exactly stunning but funds under management are down just 10pc which is less than the fall in the markets so can be seen as 'treading water' in absolute terms. Performance returns are obviously out of the window for the time being and there may be some re-writing of terms of engagement as investors may require a return to parity before the funds take their usual cut. The outlook is seen as grim though and the actual numbers were worse than forecast. We might see redemptions increase into the next half so the stock is likely to be a big faller on the open. It is a truism that companies such as Man depend for much of their value on perception and goodwill. If these are eroded it makes it difficult to repair.

The same can be said for III who have also disappointed this morning. The lack of any kind of M&A activity (combined with the fact that the next qtr is unlikely to see much improvement) is cutting into net revenues with a vengeance. All those expensively paid chaps sitting around twiddling their fingers is doing nothing for their numbers. If activity does not pick up soon then the axeman cannot be far away.

Traders continue to be bearish with most clients riding the falls of yesterday and this morning but to be fair we are merely back to the levels of Monday's close so all the activity of the last few days has actually amounted to a plate of beans. The same can be said for most of the commodities and currencies as wild swings one way and the other are being negated.

The best policy remains the one I have recommended for the last six months or more. Do nothing and sit on your hands. Sensible investment analysis is not possible in the current environment and while we can all look at the odd support, resistance or value opportunity the fact remains that this is only of use for minor risk positions.

The Tradefair Spread Betting Team