City cheers shares’ longest winning run in four years

Author: By James Moore and Maggie Pagano

The index of leading British companies finished its seventh day of rises up 37.55 at 4,481.17. The FTSE 100 has rallied by 28 per cent since it hit its low for the year on 3 March and has gained 8.7 per cent since Friday 10 July, when the run began. Market traders described the market’s hot streak as “an important achievement”.

Chris Watling, an economist at Longview Economics , said the streak was significant. “This is good news. There will be more in 2009 and I’m a bull [on the markets] for this year only because I’m waiting for the next recession. I’m not surprised by this, though. If you look at the recovery in the 1970s it was a similar pattern. You had an extremely strong run for the first three to four months, then a consolidation and then it went off again. That is what we are now seeing.”

Tim Howkins, the chief executive of the spread betting company IG Index, also reported that his clients are becoming more optimistic and are wanting to speculate on individual shares as a result. They usually do this only when they feel that markets are set to rise, he said. The proportion of IG clients doing this was down to 11 per cent in February but had reached 23 per cent in May, although that is still some way below the 40 per cent seen at the height of the bull market which ended in 2007.

“There has been more optimism and it was increasing in March, April and May, although it has tailed off a bit,” Mr Howkins said.

Market sentiment has been helped by a number of big US companies reporting better than expecting numbers, raising hopes that the US economy may be starting to recover. Yesterday Caterpillar, the world’s biggest maker of construction equipment, increased its forecast for profits and pointed investors to an upturn in demand, adding to the improved sentiment. In previous recessions, stock markets have tended to turn around two quarters before the wider economy, although economists like Mr Watling fear there could be a “double dip” recession with a brief recovery followed by another recession before sustained growth returns.

And while optimism has been growing among traders, experts still warn that the market is likely to be volatile in the coming days and the rise has not been backed by much in the way of trading volumes.

David Buik, from BGC Partners, said: “Looking at trading volumes, which have been derisive, one can only assume that market-makers have been exceptionally light on their feet, making sure they don’t lose stock. That said, there is no question that defensive stocks in the current climate look cheap. We will have to wait and see though if the current improvement can be maintained.”

The outbreak of optimism in the Square Mile, if not in the wider economy, has been further boosted by a fresh wave of investment into hedge funds. Investors ploughed $142bn (£86bn) into the resurgent sector during the last quarter, seeking to capitalise on recent outperformance. Funds lost 19 per cent of their value on average last year and investors withdrew $152bn.

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