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25 April 2008

As IC reported last month, an unexpected spike in US inflation figures triggered a major slump in share prices at the end of May. The key concern remains that this will force the US Federal Reserve and other central banks around the world to increase interest rates. This in turn would put corporate profits under pressure and possibly reduce dividend pay-outs.

The weeks following this initial sell-off generally saw share prices slip further. Although the UK's FTSE 100 achieved recovered a marginal 1.32% between weeks 20 and 25, there were further declines for the Dow Jones, down 0.71% and Japan's Topix, down 4.30%. Losses for crane manufacturers were heavier, with IC's Share Index falling 7.82%

Having said this, all four indexes are in positive territory compared to their positions 12 months ago. The Dow is 7.00% higher than it was a year ago and the FTSE 100 is up by 12.40%. Much stronger are the Topix 500 – up 31.84% – and the IC Index, which leads the way with a 76.44% rise over the last 12 months.

But, in terms of losses in the recent sell-off, the Topix has come off worst. It is down 9.15% in the calendar year to date, while the Dow (+1.26%), FTSE (+0.18%) and IC Index (+11.98) are all in positive territory compared to the start of 2006.

Uncertainty

Global stock markets could best be described as 'jumpy' at the moment. It still remains to be seen whether the falls that started in late May are merely a correction of share prices, driven by profit-taking, or whether a cyclical decline has begun. The fact that the IC Index, which is made up of highly cyclical stocks, has fallen faster than the mainstream indicators could point to a cyclical downturn, but it is just too early to say.

All eyes will be on half-year interim results, which will start to come out in late July. These will provide a clearer picture of corporate profitability, and many will be augmented with updated guidance for the rest of the year. How the markets react to this information should be very informative.

Currencies

The threat of rising interest rates in the US may be bad news for business, but there has been a positive effect on the Dollar. It strengthened 4.12% against the Yen, 2.75% against the Pound and 2.11% against the Euro between weeks 20 and 25, regaining some of the losses it suffered in April.

However, many would argue the Dollar is still far too weak. While the recent improvement is positive news for non-US exporters doing business with the world's largest economy, many would like to see it back around US$ = € 1 and ¥ 125.

Like the stock markets, the currency markets are characterised by uncertainty at the moment. It remains to be seen what stance central bankers around the world take on inflation and interest rates, and it could be several months before a clear picture emerges.

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