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Gulf growing in markets

By the middle of last week, it was beginning to look as though stockmarkets around the world were prepared to hand back the gains made earlier during the year due to hurricane Rita.

Hurricanes in the Gulf of Mexico are not new. What is new is their severity and frequency. This year looks like being a bumper year for storms in that part of the world – if bumper can be considered an appropriate adjective. What the frequency of the storms has thrown into perspective is the fragility of the oil production and refining infrastructure in that area, along with the risks associated with persistent changes in weather patterns.

For investors, there is usually the rather perverse knowledge that the necessary rebuilding programme will deliver a boost to the local economy. Where the situation is more dangerous on this occasion is in the way it is driving up the price of petrol at American pumps and oil on world markets. Dearer petrol takes money out of the pockets of US consumers and American consumption remains key to global prosperity.

It goes without saying that more expensive oil would put a dampener on the whole of the world economy. Business costs would be driven up and inflation potentially reignited. The market reaction is understandable in the sense that revisions to expectations may prove necessary if major damage is inflicted on the oil infrastructure along the gulf coast.

Oil has been featuring with great regularity recently. It was also a component of last week’s monetary policy committee minutes. What a volte face! From being divided five to four in favour of a rate cut in August, the September meeting demonstrated an unexpected degree of unanimity, as all nine members voted to leave rates unchanged. Perhaps the governor had been quietly lobbying the other MPC members. More likely, concerns that dearer oil will push up inflation – not least through adding to transport costs – caused the committee to stay its hand.

This was despite the fact that the voice of the high street is growing louder in its pleas to have cheaper money as a means of stimulating consumer activity. Even Tesco, whose results demonstrated the power of this mighty retailer by delivering profits even better than the optimistic expectations, warned that distribution cost rises were starting to bite into profitability. This alone was enough to send the shares into reverse.

The MPC must feel between a rock and a hard place. On the one hand, dearer oil will undoubtedly start to feed through into higher inflation numbers. On the other, the effect this will have on costs to industry and on household budgets could put a dampener on economic performance. It is becoming accepted that growth this year will significantly undershoot Treasury forecasts. The way in which oil is remaining persistently high in price is hardly helping things.

But oil is not the only story. The news that City bonuses are likely to be the highest for four years is an indication of the upsurge in corporate activity and a generally improving market background. The better tone to markets – until this second hurricane came along, that is – can be put down in no small measure to the existence of plenty of cash in institutional coffers at a time when company profits are surprising on the upside.

And there seems an increasing chance that your underperforming investment will be taken out by a predator. That is at least now a growing expectation. One recent report suggested that around one-fifth of the FTSE 100 index could be “in play”.

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