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Yesterday it seemed for a while that US stock markets were going to duplicate the excitable start to the New Year seen across the rest of the world.
A solid rebound in manufacturing in December added to the general cheer as markets reopened for 2007 (after being closed on Tuesday for ex-president Gerald Ford’s funeral), and at one point, the Dow Jones Industrial Average was up more than 100 points.
But then the Federal Reserve stepped in, and like a good central bank should, it took away the punchbowl…
Minutes from the Fed’s December interest-rate setting meeting unnerved investors. Several members noted their concerns over the weak US economic data, with one calling for the central bank to start indicating that ‘interest rates were now as likely to be cut as increased,’ reports The Times.
Usually the prospect of a fall in interest rates would send Wall Street into raptures. But the trouble is, the Fed as a whole remained firm on its emphasis on inflation, which remains its ‘predominant concern’. So markets were left with a nasty reminder that not only does the US economy look frail, but that inflationary pressures, and importantly, the weakness of the dollar, mean there’s no easy fix to be had simply by slashing interest rates.
Some argued that the fall-back was overdone (although the Dow still ended higher, up just under 20 points on the day). But it does go to show that when markets are acting as if skies are entirely clear, the merest hint of a cloud on the horizon can have far more extensive impact than you would normally expect.
And there are plenty of clouds still out there. Here in the UK, the festive season is already seeing its first casualties – specialist retailers are dropping like flies. Although it may not be as well known as its rivals, Music Zone was actually the third-largest music and film retailer in the UK, with 104 shops and 1,100 staff. Administrators have been appointed at the group after the banks pulled the plug on their credit facilities after a tough Christmas.
Meanwhile, greetings card retailer Greeting Card – which had 470 branches, trading under various names – has also called in the administrators. And The Times adds for good measure, that a small Wigan-based electrical retailer, H Plumb & Son, has also come a cropper, with most of its 100 staff already made redundant.
None of these casualties is terribly surprising. Both HMV and Woolworths issued profits warnings before Christmas, based largely on competition in the DVD market from supermarkets and the internet, so it would have been a miracle if Music Zone hadn’t experienced some problems. Electrical retailers face similar competition problems – supermarkets pile ’em high and sell ’em cheap, while the internet caters to the more specialist end of the market more effectively than most high street shops.
And of course, basing an entire retail chain around the concept of selling greetings cards has always been a somewhat risky enterprise – just witness the troubled history of Greeting Card Group’s listed rival Clinton Cards.
So as Robert Cole says in The Times, these companies’ troubles may say more about their business models than “trading this Christmas.”
But we suspect that there’ll be more mixed trading statements in the weeks ahead. Fashion chain Next has already reported that like-for-like sales were down 6.9% between the start of August and Christmas Eve.
All of the same problems that faced the UK consumer last year are still here – they’ve just had 12 months to become more serious. Debt levels, house prices, utility bills, interest rates – all are higher now than they were at this time last year. So there’s not much extra money to go round the shops – which suggests that any winners will have taken money from the losers – Next’s problems are almost certainly down to Marks & Spencer’s revival.
We’ll see in the weeks to come – but the Fed’s dilemma, and the troubles at Greeting Card Group, Music Zone and others are all useful reminders that there are risks aplenty at the start of 2007, and investors would do well to bear them in mind while others get carried away with New Year exuberance.
Turning to the wider markets…
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In London yesterday, the FTSE 100 closed 8 points higher, at 6,319, following a volatile day’s trading. The biggest gains were recorded in the banking sector, with Barclays, Royal Bank of Scotland and Northern Rock among the day’s biggest risers. For a full market report, see: London market close (/file/23529/london-close-footsie-shrugs-off-weak-miners.html)
Elsewhere in Europe, the Paris CAC-40 closed 6 points higher, at 5,610, and the German DAX-30 ended the day at 6,691, a 10-point gain.
After a strong start on Wall Street, concerns over the latest minutes from the Fed saw the markets sacrifice earlier gains. The Dow Jones reached a fresh record high in intra-day trading, but slipped back to 12,474 by the close, a gain of just 11 points. The tech-rich Nasdaq was 7 points higher, at 2,423. And the S&P 500 closed one point lower, at 1,416, as energy shares were hit by a fall in the oil price (see below).
In Asia, the Nikkei closed at an eight-month high of 17,353 today. The index gained 127 points, driven by demand for Sony and Toyota shares.
Crude oil had fallen by over 4% this morning to $58.23 a barrel. In London, Brent spot last traded at $57.11.
Spot gold had hit an intra-day high of $630.20 this morning, and silver climbed to $12.60/oz.
And brewing giant SABMiller made further ventures into the Chinese market today, as its China venture China Resources Snow Breweries acquired Blue Sword for $320 million.
And our two recommended articles for today…
First five days: an investment myth to ignore
– This New Year indicator holds that the first five days of January can predict the direction of the market for ther rest of the year. It’s popular – but completely useless, says D.R. Barton of the Smart Options newsletter. To find out why the ‘first five days doesn’t indicate what it’s supposed to, read: First five days: an investment myth to ignore
Why small oil companies offer bigger upside
– Oil majors may be the safest investment, but the small players offer the prospect of greater returns. We pick two small oil stocks to keep an eye on: Why small oil companies offer bigger upside.