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Confidence tricks

The news is not all bad but background events are unnerving investors

What a difference a week makes. Risk on – risk off. It’s enough to make any prudent investor head for the hills.

And it has not been just a one-horse show either. First, it was the Chinese slowdown that spooked the market. Then along came some indifferent employment data from the US. The final straw was an unsatisfactory bond auction in Spain and a spate of recrimination among the more embattled of Europe’s nations. Little wonder that much of the early gains achieved this year were handed back.

It is worth taking a look at the charts of recent market moves. The FTSE 100 index, having regained 6,000 in 2010, reaching a high of just over 6,100 in February 2011, failed to breach 6,000 in the first quarter of this year, admittedly only by a whisker.

European bourses, as shown by the Euro Stoxx 50 index, fell more last year but recovered more swiftly recently. They too have suffered of late.

America, in contrast, easily beat the 2011 highs in the first quarter and the S&P 500 index is still above support levels.

The US, it is true, is in an election year, when the administration can be expected to pull out all the stops to keep the electorate sweet. Still, economic signs are more encouraging there than here and in the rest of Europe.

Should we trust the data? The world’s biggest economy is remarkably adept at changing to suit circumstances, so perhaps we can take the good news at face value.

Given the way that Wall Street has comprehensively outperformed European markets, it can be argued it is in the price. However, news emerging from the battle-ground that is the single European currency zone is hardly designed to encourage. The blame game is in full swing, with the Italian prime minister accusing his Spanish counterpart of precipitating the latest twist in the crisis and the Bundesbank apparently preparing for a disintegration of the eurozone.

We all know Germany is impatient with the progress being made in the over-indebted Southern European countries but the trouble with seeking to protect yourself from the fallout of a euro collapse is that you can hardly blame other central banks from doing the same. The ultimate result of such action is that nobody will be willing to take debt on board from nations threatened with expulsion from the single currency. It is protectionism of a sort – and just as damaging.

Among the good news stories, though, were some better than expected corporate results from the US and news that shale gas deposits are being exploited on both sides of the Atlantic to the extent that gas prices are being driven down. Extracting shale gas is not without controversy. The methods used have been blamed for causing mini-earthquakes. Over here, one major deposit is close to Blackpool. One shudders to think of what might happen to the tower.

And last week, Nokia took a tumble. There was a joke doing the rounds in the middle of the TMT boom back at the turn of the new millennium. What do you call a Finnish index tracker? Answer – Nokia. Then it accounted for well over half of the Helsinki market’s capitalisation. Today, it isn’t even the biggest company listed over there. A true lesson in how fortunes can fluctuate.

For now, we must take what comfort we can from snippets that at least bring a little light relief to investors. News is by no means universally down-beat but Europe continues to undermine confidence. The trouble is that wanting it to stop swiftly could turn out to be another lesson – be careful of what you wish for.

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

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