Every Monday, Wednesday and Friday our European Short Term Update brings you forecasts of the FTSE, DAX, CAC, SMI, AEX, IBEX 35, S&P/MIB and Euro Stoxx 50. The latest Update also covers the DJ Euro Stoxx Sectors: Energy, Healthcare, Insurance and Retail; Toronto TSX 300 Index, Brazil Bovespa Index, JSE Africa All Share Index; plus a 4-minute video forecast for the French CAC40 index. See the April 23 issue of the ESTU online now. (Yours risk-free for 30 days.)
Last night, I saw the London-based independent comedy “Run, Fat Boy, Run.” To summarize the film: Desperate man vows to finish 26-mile marathon to win back the heart of the woman he loves. Crisis arrives at mile 17, a.k.a. the Wall. After nearly giving up, man triumphantly taps into a deep reserve of energy and breaks through.
I thought the plotline sounded familiar -- In the race to win back the health of London’s credit-inflicted economy, the Bank of England slammed into a similar “wall.” Yet, as far as the “experts” can see, the B.O.E. is now bursting through to the other side with the help of two main energy stores: Rate cuts & Cash infusions.
Since December 2007, the B.O.E. has cautiously loosened the lending spigot: three quarter-point reductions to 5.0%. In the hours leading up to the most recent April 10 drop, the following news items spoke for the crowd: “Rate Cut Hope Lifts London Stocks” (AP) -- and -- “[Nothing] is going to take the place of what we believe will be further necessary and quite significant cuts in interest rates.” (New York Times)
You can read more on this website about comprehensive coverage of the world’s leading stock indexes, including London’s FTSE 100, France’s CAC 40, Germany’s DAX Index and many more. Learn more about Global Market Perspective.
Here’s the problem: After tracking the Bank of England’s monetary policy changes from 1984 to the present, alongside the performance of the FTSE 100 over the same period -- there proves to be no consistent correlation between a rise in rates AND a fall in stocks:
- March 1984 to October 1989: BOE boosts rates from 8.5% to 15% -- AND -- The FTSE 100 doubles in value from 1016 to 2142.6.
- October 1989 to February 1994: BOE cuts rates from 15% to 5% -- AND -- The FTSE 100 continues climbing from 2142.6 to 3328.1.
- February 1994 to June 1998: BOE raises rates from 5% to 7.5% -- AND -- The FTSE 100’s uptrend is uninterrupted, soaring from 3328.1 to 5832.5.
- January 1998 to July 2003: BOE slashes rates from 7.5% to 3.5% -- AND -- The FTSE 100 nosedives from 5832.5 to 3951.
- July 2003 to August 2007: BOE lifts rates from 3.5% to 5.75% -- AND -- The FTSE 100 goes on a tear, rallying from 3951 to a seven-year high of 6659.
For what it’s worth, Cash Infusions do not breathe new life into a knackered economy either. On April 21, the Bank of England launched its long-awaited “Special Liquidity Scheme”: struggling lenders swap risky mortgage-backed bonds for $100 billion of government bonds.
That day, the FTSE 100 soared above 6,000 to a five-week high. In the words of one industry veteran: “I think the B.O.E.’s move is similar to what the Federal Reserve did a couple of months back. Basically, it’s a worldwide effort to maker sure that the credit crunch doesn’t get out of control…”
News flash: Since August 2007, the Fed has injected more than $200 billion in short-term loans into the U.S. economy, yet the credit crunch remains conspicuously beyond its “control.”
In the end, one truth remains: By the time the Bank of England breaks through the “wall,” the larger trend in the FTSE 100 will already be crossing the finish line.
Case in point: the index’s most recent uptrend began on March 18, long before the latest B.O.E. rate cut and recent “Swap Scheme” debut. And, in the March 28 Global Market Perspective publication, our labeled price chart of the FTSE 100 drew a bold arrow pointing UP for the coming weeks.
The 6% rally since then speaks for itself.
You can read more on this website about comprehensive coverage of the world’s leading stock indexes, including London’s FTSE 100, France’s CAC 40, Germany’s DAX Index and many more. Learn more about Global Market Perspective.