Strong start

Those who follow the stock markets may have thought “Oh no, not again,” during the first few weeks of the year. Just when oil prices, the dominant issue of the last two years, looked like they were finally coming under control, international political tension over Iran and violent unrest in Nigeria looked like sending it through the roof again.

Having hit significant highs in the first week or two of the year – the Dow broke through the 11000 point-mark in week 2 – the markets sagged heavily on this news. But despite oil reaching US$ 68 per barrel and staying there, share prices managed to recover most of their value.

The Dow finished week 4 up 1.77% from its position at the end of 2005, at 10907 points – again threatening the 11000-mark. In London the FTSE-100 was up 2.57% over the same period, close to a five-year high, while the Topix 500 continued to storm ahead with a 3.39% gain.

But once again it was the lifting segment that took top honours. IC's Share Index put on 11.5% over the same period to take it to an all-time high of 366.29 points. This was achieved thanks to bullishness in Japan and the US outweighing losses for the two European components of the index.

As previously reported here, Japan's stock market has been enjoying a spectacular rally since mid-2005, and the growth in early 2006 for the Topix 500, along with Hitachi, Kobe Steel and Tadano reflects this on-going buoyancy.

The sharp rises for Terex and Manitowoc are a little surprise, given that it came ahead of both companies' annual results. However, as IC went to press, several other companies in the heavy equipment sector, most notably Caterpillar, had reported very up-beat results. Cat's sales were up nearly 20% on last year to $ 36.3 billion, but more importantly, its net profit was up more than 40% on 2005.

This of course gave Cat's shares a lift, and being such a dominant force in the construction and mining equipment business, Cat's rise benefited others in the sector. In a sense this is gambling on imminent results from the likes of Terex and Manitowoc. On one hand, Cat is a reasonable bell-weather for the sector, so this surge might be justified. But it is still a gamble that assumes these other companies will enjoy a similarly sharp profit rise. Whatever the case, we will know by the late February deadline for filing results.

Currencies

The early part of the year saw the US Dollar lose value to both the Euro and Pound, although it managed a small gain against the Yen. The longer-term trend for the Dollar is perhaps more interesting though. It gained strongly against all three currencies last year, and the question now is which direction it will take.

It has certainly been helped by rising interest rates in the US over the last 18 months or so, but the point is clearly approaching where these will level off. The doom mongers point to America's large budget deficit, as a source of weakness in the Dollar, which could combine with rising interest rates elsewhere in the world to spark another sharp fall for the Greenback.