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Money Marketing Markets: Light at the end of the tunnel?

Another short but eventful week in the markets has seen the FTSE 100 gain 4 per cent.

The bulk of this came on Tuesday when the blue chip index surged by 3.53 per cent as it played catch up with the Americans, who did not have the luxury of a Bank Holiday on Monday to finish off their Easter eggs.

The S&P 500 had bounced sharply following the news that JP Morgan Chase had increased its offer for Bear Stearns by fivefold.

“JP Morgan increasing its offer for Bear Stearns provided confidence that there is light at the end of the tunnel,” says Charlie Luke, a UK fund manager at Aberdeen Asset Management. “It also shows that it is such a good deal they are willing to pay more for it.”

The revised offer of $10 a share, up from $2, values Bear Stearns at $1.19bn, and could be enough to stave off a shareholder revolt, which had been threatened to block it being sold off at a firesale price.

This sparked a global rally led by financials, which were also bolstered by a shock rise in US home sales. This added to hopes that the sub-prime woes are working their way through the system.

The report showed American house sales actually increased in February- the first rise in seven months.

HBOS, which had already shrugged off last week’s dodgy rumours, led the way with a 15 per cent gain.

“The management of HBOS have been buying a lot of shares and if people intimate with the business are investing in it, it raises market confidence,” Luke says. “They have done rather well too,” he notes.

Barclays, Lloyds TSB and Royal Bank of Scotland were also all up between 5-10 per cent.

Housebuilders were also among the winners with Persimmon, the sole FTSE 100 stock, such have been the ravages in the sector, up 10 per cent, while property stocks British Land and Land Securities also gained momentum.

Persimmon promptly lost 5 per cent on Wednesday, perhaps due to profit-taking, before gaining 7 per cent on Thursday as bid speculation mounted. This followed legendary investor Martin Hughes raising his Redrow stake. Come lunchtime Friday, it had fallen back 7 per cent.

“It is a very volatile sector,” Luke says. “The housebuilders have fallen today after a Nationwide report showed house prices rose by just 0.1 per cent in March on a yearly basis.”

Confidence remains brittle in the current climate. Retailers also took a beating on the back of weak consumer confidence figures on Friday.

The retailers had been having a decent week, with the market reacting well to Sainsbury’s fighting talk, as chief executive Justin King vowed to battle any suppliers trying to hike prices. Kingfisher also came through relatively unscathed after slashing its dividend to cut costs.

Marks & Spencer even edged higher over the week, despite a 2.57 per cent fall on Friday. M&S had found itself at loggerheads with a number of shareholders over its plans to make chief executive Sir Stuart Rose executive chairman as well.

Legal & General expressed its concerns, saying it flies in the face of good governance.
“We are also monitoring the situation closely. It does not say much about their succession planning,” Luke says.

Back to the Banks on Wednesday with Bank of England chief Mervyn King hinting strongly that more interest rate cuts are in the offing. The market barely reacted on the day, down 28.7 points at 5660.4 but the banks rallied on Thursday, helping drive the FTSE up 57.1 points.

This came despite Libor reaching a year high of just over 6 per cent- more than 75 basis points over base rate.

New Star chief economist Simon Ward says this is because banks have exhausted BoE funding, attempting to borrow £37.8bn when only £13.6bn was available.

He says: “Banks have exhausted the longer-term liquidity support provided by the Bank of England in tandem with other central banks around the turn of the year and are again scrambling to secure funding in the interbank market.

“This would suggest a need for a further expansion of such “lender of last resort” operations – a possibility now reluctantly being considered by the Bank of England.”
Ward believes banks are also borrowing heavily from the European Central Bank and are still managing to securitise loans as collateral with the ECB and BoE.

So whether this weeks rally proves to be a ‘dead cat bounce’ remains to be seen but clearly liquidity is still at a premium.

Mining stocks also remain in a froth with Vale’s collapsed takeover of Xstrata meaning every other rival is now being viewed as a merger partner- cue the rumour mill and short-lived rallies- a feature that has characterised the market all year.

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