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Autumn of the euro

By the time you read this we will all know what the Chancellor has in store for us in the autumn statement. It is hard to imagine there will be much in the way of giveaways but attention is likely to be focused on any measures designed to improve the lot of our economic performance.

Room for manoeuvre will be limited, although interestingly last week saw the cost of German borrowing rise above that of the UK.

The end-game in the future of the euro may now be under way. The fact that investors are shunning German bonds suggests opinion is moving towards issuance of eurozone bonds and the European Central Bank becoming the lender of last resort, notwithstanding the objections voiced by the German government. This will push up the cost of borrowing for Germany, something the market is doing anyway, but it could trigger inflation.

This is why the Germans are so opposed to the ECB adopting the quantitative easing approach of the US and the UK. The reason may be because of the disastrous inflation that ushered in the National Socialist regime in the 1930s. More likely, it is because it will be perceived by the electorate there as Germany bailing out profligate nations with taxpayers’ money – and there will be an election there in 2013.

So the European problems rumble on and shares in this country have been succumbing to death by a thousand cuts. By the end of last week, the FTSE 100 index had experienced its longest run of down days for nine years. It was all feeling a bit grim as I tried to reassure listeners to Radio 2 that Armageddon had not yet arrived. The run of bad days had brought the index down by just 8 per cent – a worrying amount but hardly cata-clysmic. Just over 24 years ago, this same index fell by more than 20 per cent, an altogether unsettling experience. The occasion was Black Monday in October 1987, when a London market that had been closed the previous Friday because of the hurricane that had raged through the South-east had to cope with two days of major Wall Street losses.

Then, the selling pressure was intense. Today, all the indications are that it is a lack of buyers that is driving the market down rather than the panic dumping of stock. This could mean that the market will turn on a sixpence but, with so much uncertainty around, only the brave are dipping their toes in the water.

One eminent fund manager remarked last week we could lose a further 25 per cent off this market before a floor is reached. As we are close to 30 per cent below the peak reached nearly 12 years ago, I sincerely hope he is wrong.

But not everything is negative. There are tentative signs of manufacturing jobs returning to the US. It seems a combination of rising wages in China and a strengthening of their currency against the dollar, coupled with dearer transportation costs due to higher fuel costs, are eroding the cost advantage the world’s second-biggest economy has been enjoying. So far, it looks like just straws in the wind but, with American wages static or even falling, it could develop into a trend.

It will be worth watching what happened on Black Friday in the US last week. Traditionally the busiest shopping day of the year, the Friday after Thanksgiving Day is considered the day on which US retailers move into profit – from the red to the black. So important is it in the retail calendar it now starts on Thursday evening. A good result would indicate much needed returning consumer confidence.

Brian Tora is an associate with investment managers JM Finn & Co



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