Conflict impacts

25 April 2008

In early July it looked like the world's stock markets were making a good recovery from the long losing streak that was triggered by high US inflation figures in mid-May. However, week 28 saw the outbreak of fierce hostilities between Israel and the Lebanese Hezbollah militia, which prompted oil prices to spike and stock markets to fall.

Oil hit a brief high above US$ 78 per barrel, which is worryingly close to the all-time high around US$ 84 (in today's money) seen in 1979 following the Iranian revolution. With the hurricane season yet to strike the Gulf of Mexico, and tensions still high in the Middle East, it seems more than likely this ceiling will be broken before the year is out.

Resilience

Despite these problems, share prices have shown some reasonable resilience. There were improvements following mid-July's dive and, by the end of the month, the markets were a little above where they were in late June.

Between weeks 25 and 30 the Dow achieved a narrow net gain of 0.74%. The Topix was stronger with a 2.70% improvement and the FTSE 100 was surprisingly resilient with its 3.67% growth. Like the Dow, IC's Share Index enjoyed a marginal improvement, with a 0.55% rise over the five week period.

So there is clearly resilience in the market, and this is borne out by looking back 12 months. The FTSE 100 and Topix 500 look good compared to the end of July 2005, and are up 12.04% and 30.26%, respectively. The Dow is also in positive territory, with a 4.32% improvement on a rolling 12 month basis.

But it is the lifting sector that leads the way, with IC's Share Index up a huge 56.18% compared to a year ago. This underlines the sector's ongoing buoyancy and profitability. Indeed, the fact that there have been three share splits this year, most recently Terex's two for one split in week 28, emphasises the strong demand for lifting companies' equity on the markets.

Currencies

Weeks 25 to 30 were marked by the Bank of Japan raising interest rates above 0% for the first time in more than six years. The 0.25% increase was more symbolic than material, but it still illustrates growing confidence in Japan's economy.

July also saw Federal Reserve chairman Ben Bernanke tell Congress that the end could be in sight for US rate rises. He said there were still concerns about inflation, but that cooling growth in the economy would neutralise the effects.

Both events prompted a weakening of the Dollar, although its biggest fall was a 1.72% drop against the Pound, followed by a 1.20% fall against the Euro. It was down just 0.34% against the Yen.

Outlook

All eyes are on the Middle East at the moment. If tensions cool, the markets may stage a prolonged recovery. However, an escalation in violence is a serious concern, and if the situation gets worse it could even push the global economy into recession. •

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