Tuesday, July 25, 2006

Short view By Philip Coggan - Financial Times

Short view By Philip Coggan
Copyright The Financial Times Limited 2006
Published: July 25 2006 03:00 | Last updated: July 25 2006 03:00


Investors showed some signsof recovering their nerve yesterday, helped by takeover activity and hope the Israel-Lebanon attacks could be resolved without spreading into a wider war. Gold dropped to $606 at one stage and more importantly, oil is now back below $74 a barrel from the $78 it reached earlier this month.

Relief at the oil price decline undoubtedly helped European equity markets to enjoy a solid session while Wall Street opened in positive mood.

But this rally may not last: sentiment is clearly fragile. Ian Scott of Lehman Brothers points out that US mutual fund investors sold a net $800m in international equity funds last week. Past periods when investors have repatriated funds have tended to coincide with market crises such as Black Monday in 1987, the first Gulf War and the Russian crisis of 1998. They have tended to represent buying opportunities for equity investors, with an average subsequent 12-month gain of 19.3 per cent.

State Street, which through its custody arm sees a lot of institutional fund flows, argues that big investors are in "safety first" mode, with a reduced attitude to risk. They have not reached the "riot point" stage, where there is a wholesale retrenchment of portfolios and a flight from equities.

Perhaps it is difficult for the markets to establish a decisive trend because investors are being presented with two contrasting pools of information. On the one hand, central banks in the US, eurozone and Japan are all raising interest rates leading to understandable worries about a "liquidity squeeze", which geopolitical concerns have exacerbated.

On the other hand, the news from the corporate sector is still very good. According to Citigroup, as of July 20, US second quarter results had beaten expectations by a weighted average of 4.6 percentage points and were 14.9 per cent up on a year ago.

Sentiment may only tip decisively in one direction or the other if either the peak in interest rates is clearly in sight (hence last week's rally on Bernanke's perceived dovishness) or if profit estimates start to be revised significantly lower.

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