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Money Marketing Markets: FTSE rebounds after third worst month on record

As January goes so goes the year, according to the cliché, but investors will be praying that it does not come true.

The FTSE 100 ended January 9 per cent down- its third worst ever monthly performance and only surpassed in the deep bear markets of 2000 and 2003.
Does that mean we are in a bear market now? Despite a raft of bad news, the market is actually ending the week having pushed through the 6,000 barrier before slipping back after a 103 point rally by mid-afternoon today.
That barely looked possible on Thursday morning after growing concerns about the state of the US economy and further twists in the credit crunch saga sparked panic. The blue chip index was down 150 points at one stage before rallying to close up 42.5 points at 5879.8. That saved the month being the worst ever on record.
Banks bore the brunt of the bearish sentiment as rumours of a further massive write-down at UBS then Japanese bank Mizuho announcing a $4.2bn sub-prime write-off resulted in a financials sell-off.
Barclays, HBOS and Royal Bank of Scotland all slumped by over 10 per cent in the morning before positive noises from US monoline insurer MBIA triggered the rally.
The perceived shakiness of the monoline insurers continues to be a dark cloud, however. Despite MBIA’s reassurances, municipal bonds are trading on credit spreads that imply the insurance provided by the monoline giants is worthless.
The gloom for the financial sector looks set to continue.
Roger Noddings, chief investment officer at HSBC Investments, says with banks at multi-year lows an awful lot of bad news is priced in already but the near-constant poor news flow and lack of clarity about their exposure to sub-prime keeps holding the sector down.
The US has once again dominated the news this week.
The Fed cut interest rates by 50 basis points mid-week to no-one’s surprise- 86 per cent of analysts called the move with the other 14 per cent opting for a 25 point cut.
Noddings says the markets reaction was largely muted as the move had been so widely telegraphed.
“The market rallied ahead of the announcement and faded after it,” he says. “The 75 basis point mid-meeting cut did have a big impact but it was unfortunate it happened in the middle of the unwinding of the SocGen trades.”
The rate cut has helped drive the sectoral shift toward interest rate sensitive stocks, says Standard Life Investments global investment strategist Richard Batty.
Kingfisher and Next were both up more than 8 per cent over the week, benefiting from this trend.
Batty also points to industrial cyclicals as winners over the week, albeit bouncing from very low levels.
Manufacturing is not looking so hot though. The Purchasing Managers Indices in both the UK and China were weaker than expected in January.
This was compounded by weak US GDP data, which only came in at 0.6 per cent annualised for quarter four.
“The economy has essentially stagnated,” says Batty. “The questions are how severe will the US slowdown be and how will it affect the rest of the world?”
Batty adds further bad news from the US housing market completed the week’s macro doom and gloom. The Case-Shiller US national house price index fell by 8 per cent revealing that house price falls over the pond are actually accelerating.
The Fed’s statement that it wants to “underpin financial markets” may well be tested sooner rather than later if the latest round of rate cuts do not filter through in the next few months.
Back in blighty, Shell reached for the record books after posting a staggering $27bn profit, smashing European records. Not all that glisters is gold, or even black in this case, however. The numbers mask a fifth consecutive year of rising capital expenditure and falling production. The oil companies are having to spend more to get less oil out of less accessible places and in increasingly volatile countries.
Not that the unions were too sympathetic.
Commodities had a rollercoaster week all round, buffeted by the weak macro data, South African power failures and heightened bid talk.
But feverish speculation on Friday that BHP Billiton would renew its bid for Rio Tinto helped the latter up 13 per cent on Friday and 20 per cent for the week. BHP has added 13 per cent and Xstrata 12 per cent on consolidation rumours.
Elsewhere, we could be set for a job merry-go-round in the financials sector. Friends Provident’s retrenchment from several product lines is likely to see 600 jobs slashed. On a more positive note, LV is aiming to recruit 100 a year to drive its push to become a top five insurer. Anyone fancy a move to Bournemouth?

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