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Global stock markets kicked off the New Year in good shape.
The FTSE 100 closed 90 points higher at 6,310, its highest point since January 2001. The FTSE Eurofirst 300 index of top European stocks closed above 1,500 for the first time since February 2001. And across the Asian region, markets in Jakarta, Hong Kong and Sydney all hit records, reports the FT.
So have markets started the year as they mean to go on?
Almost everyone out there is pretty bullish about the year ahead.
Unlike last year, when fears over global imbalances, energy costs and rising inflation made most commentators sound a note of caution, this year most seem to have been taken by surprise that we made it through 2006 intact – so they’ve decided that the world economy is invincible.
Talk of global imbalances has been replaced with the idea that the US no longer matters, because Germany and Japan will take up the slack. The US housing market slump will apparently have no impact on the wider US economy, and by extension the world economy.
Property prices in most other parts of the world, including the UK, will keep rising; slowing economic growth will tame inflationary pressure, keeping interest rates low; and that will mean the merger & acquisition boom will just keep on going.
What a wonderful year lies ahead of us. But as Edward Hadas on Breakingviews.com points out: ‘You don’t need to be a perma-bear to worry about stocks in 2007, not when most market-watchers are calling for everything to go just right.’
As Hadas puts it, the fall-out from the tech boom is now just far enough in the distance that ‘the rear-view mirror is looking perfectly clear.’ And even though the economic forecasters are always quick to point out that ‘past performance is no indicator of future performance’, they almost all rely exclusively on very recent history to inform their opinions of what’s likely to happen in the coming year. The good times have been rolling for several years now – so why not another?
But there are plenty of potential flies in the ointment. ‘The bond market is counting on a US slowdown causing a decline in inflation. It could be right.’ But ‘if equity forecasters are right about strong growth, then inflation could push higher.’ And then of course, there’s the ever-unpredictable world of geopolitics, with any number of loose cannons in the Middle East capable of causing a serious spike in the oil price.
Meanwhile, here in the UK, the occasional bear is rearing its head. For example, David Smith of the University of Derby – a member of the ‘shadow’ Monetary Policy Committee which meets every month under the auspices of the Institute of Economic Affairs – reckons that UK interest rates could rise as high as 5.75% by the end of next year, and hit 6.25% in 2008. He believes monetary policy has been too slack for too long, while the Chancellor’s profligacy hasn’t helped the Bank of England’s attempts to curb spending.
And others seem to be quietly taking out insurance against the potential risks out there. As Ambrose Evans-Pritchard reports in The Telegraph, gold saw solid gains – heading over $640 an ounce – as the year kicked off, on news that one of the European Central Bank system’s 12 members ‘had begun buying bullion, the first such purchase in years.’
The ECB reported that one of its members bought gold in the week before Christmas, but did not say which one. An ECB spokesman described the purchase as ‘an end-of year ‘technical’ adjustment.’
But as Evans-Pritchard points out, the ECB banks have been major sellers of gold since the euro’s launch in 1999. ‘Constant ECB sales have acted as a cap on rallies.’ So if any of its members are thinking of switching sides, then it could have a serious impact on the gold price – and also put more pressure on the dollar.
So it seems fair to say that – just like last year – it’ll be worth having some gold in your portfolio. Just in case. For more on buying gold, you can read a recent guide from one of our contributors on the website – just click here: A beginner’s guide to buying gold
Turning to the wider markets…
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In London, the FTSE 100 ended the day at a six-year record high of 6,310 yesterday, having climbed 90 points. The blue-chip index was boosted by strength in the mining sector and newspaper reports of M&A activity. Standard Life was the day’s biggest gainer on bid talk in the banking sector. For a full market report, see: London market close
Across the Channel, Paris shares closed at their highest levels since May 2001. The CAC-40 ended the day 75 points higher, at 5,617, with Suez gaining on hopes that billionaire Francois Pinault would make a takeover bid for the firm. In Frankfurt, the DAX-30 also closed higher, gaining 84 points to end the day at 6,661.
On Wall Street, the stock market was closed for the funeral of former president Gerald Ford.
In Asia, the Hang Seng hit yet another record closing high today, having gained 103 points to close at 20,413. Japanese markets remained closed.
Crude oil futures were trading at $60.69 today, whilst Brent spot was at $59.50 in London.
Spot gold last traded at $640.40, little changed from $640.10 in London late last night.
And in London this morning, shares in maker of Bluetooth chips, CSR, fell by as much as 6% as it was named at the centre of a patent infringement case brought by the University of Washington against mobile phone makers Nokia, Samsung and Matsushita in the US.
And our two recommended articles for today…
How to survive Britain’s debt crisis
– As the credit card bills and bank statements begin to arrive this month, the true scale of Britain’s Christmas spending splurge will become clear. What do our dizzying levels of consumer debt mean for the economy as a whole? To find out how to protect yourself – and profit – read our recent cover story on debt, now available to non-subscribers: How to survive Britain’s debt crisis
Trouble lies ahead – but you can still turn a profit
– There are serious risks in the markets in the coming year, but investors can still turn a profit. To find out which UK stocks and foreign markets Merryn Somerset Webb recommends for the year ahead, click here: Trouble lies ahead – but you can still turn a profit