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Money Marketing Markets: A rollercoaster week for the “corporal Jones” FTSE

Investors have endured a white-knuckle ride after one of the most volatile weeks in the FTSE’s history.

The FTSE 100 looks set to end the week more or less where it started, reaching 5932.3 at noon on Friday after opening at 5901 on Monday.
That statistic masks the jitters that led to the sharpest one-day fall since 9/11 on Monday, wiping £77bn off the value of stocks.

“It was a bit of a corporal Jones week,” says Neil Cumming, manager of the PSigma UK growth fund. “It was a case of ‘don’t panic’, but the market has been so nervous I am struggling to remember a week when we have had such volatility.”

Monday’s 323 point, or 5.5 per cent, drop was sparked by growing concerns about the US economy, as the market went into “full-scale worry mode” says Cumming.

The fact the US market was closed for Martin Luther King day and sharp falls in Hong Kong only served to exacerbate fears.

‘Helicopter Ben’ Bernanke’s shock unscheduled 75 basis point rate cut on Tuesday provided something of a kicker for markets but perhaps not as quite as much as hoped.

The markets welcomed the move and it helped the FTSE to rally by 161.9 points or 2.9 per cent after being 4.3 per cent down earlier in the day.

However, when the US reopened on Tuesday, the sheer weight of sell orders dragged the S&P 500 down by almost 4 per cent in a matter of minutes although it did recover to close down 1.1 per cent.

The Fed’s rate cut was brought forward by nine days such was the extent of its concerns about the state of the market. It was its first unscheduled move since September 17, 2001 and the largest single rate cut since 1982.

“The rate cut has injected an element of confidence,” says Colin Morton, manager of the Rensburg UK equity income fund. “But a lot of people are also cynical and are wondering if the Fed knows something we don’t.”

The leaking of plans to refinance US monoline insurers also bolstered the markets. The term monoline seems to have entered most investor’s lexicon in the last fortnight as concerns that one or more of the bond insurers may be facing difficulties resulted in fears about the potential knock-on effects on the credit market.

While the authorities may be doing what they can to help boost the markets in the US, investors were disappointed by hawkish comments from Mervyn King this week.

“Many people assumed the UK would follow the US and cut interest rates in a marked fashion in February but Mervyn King has said no,” Cumming says.

The minutes from the January session showing an 8-1 vote against a cut also surprised many with many commentators having expected the vote to be a close run thing.

This helped spark a further 130.8 sell-off on Wednesday before a sharp 266.5 point Thursday rebound, sparked by strong rises globally.

Friday has been a day of relative calm with the FTSE up 67 points or 1.18 per cent in early afternoon trading.

“It has been an exhausting week,” says Morton. “I think the volatility will continue until the economic landscape is clearer.”

He says the broadly flat market this week also masks significant sector rotation.

Continuing the theme of the last two weeks, housebuilders have performed strongly with Persimmon and Barratt both up more than 10 per cent.

Financials also outperformed with banks up between 5 per cent- 10 per cent.
“Defensive stocks were on such high ratings many have fallen sharply and more recently interest rate sensitive stocks have been outperforming,” Morton says. “But there is such a dichotomy of opinion with some people wanting to stay defensive and others starting to look through the gloom.”

Cumming agrees, pointing to Imperial Tobacco, off 10 per cent and BT down 6.5 per cent as further evidence of a sector rotation.

He says it unclear how much the SocGen scandal has added to volatility as the investment bank unwound ‘rogue trader’ Jérôme Kerviel’s trades.

Kerviel gained the dubious honour of perpetrating the biggest fraud in investment banking history this week. His bets lost the bank a staggering £3.9bn forcing it to seek emergency refinancing.

While the French bankers might be forgiven for drowning their sorrows it was trebles all round at Scottish & Newcastle, which was finally snapped up by a Carlsberg-Heineken consortium for £7.6bn.

Bid speculation also drove Friends Provident 8 per cent higher with private equity firm JC Flowers running the rule over the insurer.

It seems there is still some appetite for big deals.

Richard Unwin, head of asset allocation and economics at Merrill Lynch, this week says there are signs of “capitulation” from investors “in the face of steep declines”.

It would have been costly to have sold out on Monday but this market certainly isn’t for the faint-hearted.

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