Markets shrug off terrorists

Unlike 9/11, the world is now aware of and prepared for the effects of terrorist attacks. As a result, the death and destruction in the London public transport did not really impact or even register on the fundamentals. In point of fact, the Dow Jones Industrial Average rose 71 points to close at 10,520, an increase of 0.7%.

The broader Standard & Poor’s 500 index was up 7.58 points to 1,219, a gain of 0.6%. And in the UK, the FTSE 100 rose further on Monday, following on its strong showing on Friday, adding another 10.2 points to the 73.9 points logged on Friday. The FTSE closed at 5242.4, up almost 1.7% in the two days after the bombings.

Also last week, natural disasters reached out. Hurricane Dennis caused a number of platforms and drilling operations in the US gulf to shut down, and threatened the United States major oil importation ports which are scattered with 38% of the country’s refining capacity. But on Monday, US light crude oil future contracts for August delivery fell 71 cents to settle at $58.92 a barrel on the New York Mercantile Exchange, after Hurricane Dennis passed through the Gulf of Mexico with little damage to the oil facilities.

On the currency front, we note that the US dollar continued its rise against many currencies this week, ending the week around US$1.20 on the euro and 1.74 on the Pound.

Sense of Wealth

Had a chance this past week to discuss the forward look with some key players in the real estate, manufacturing and financial markets. It seems to us, that the cornerstone factor in determining how well the world’s leading economies will continue to progress comes down to the individual sense of wealth that the general populace feels. If people withdraw their confidence and slow personal spending, it will set a destiny of shrinkage.

We do not feel however, that this scenario is all that likely. Once again we would like to direct investors to the sensation of the media and their need to be entertainment first and factual reasoned information reporting somewhere lower down in the priority list. Truth is, available cash to fund purchasing is good, consumer debt, although high, is not that bad as a percentage of net worth. Consumer confidence is up, stock valuations are good, earnings are good and the economic statistics (reported below) actually show health and prosperity, not doom and gloom. What other than a dramatic event can go wrong now to upset the clear growth path we are on?

United States:

In the US this week, the services industry grew faster than forecast in June as companies hired new employees.

United Kingdom:

Of course our hearts go out to those affected by the four bomb blasts that hit London’s financial district and city centre last Thursday. UK stocks tumbled immediately after news that the bombs killed more than 30 people, shutting down the transportation system. As discussed above though, stocks rallied last Friday as investors realised the death and destruction did not materially effect the country.

We also note there was some speculation that the terror attacks would prompt the Bank of England (BoE) to reduce interest rates. But interest rates were left unchanged last Thursday at the central bank’s Monetary Policy Committee meeting, which took place after the terrorist attacks. However, as we had speculated in recent articles, a survey of economists announced that it is likely the BoE will lower its benchmark rate in August to stimulate the economy. The pound headed for its third weekly drop as a result and home owners started to brace for impact of rising mortgage rates.

Looking Ahead:

The economic outlook looks good as companies prepare to release their quarterly statements. Numbers on GDP growth, inflation and productivity gains should translate into decent earnings gains, in the leading nations. We also see a general attitude towards the market moving higher. This is reflected in how well investors shook off the bad news recently. Consider that neither the recent record high oil prices, the lukewarm US jobs report, or even the London terrorist attack caused the markets to loose momentum.

www.investments-intl.com.

email darcy@investments-intl.com