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Nervous system

We had another little rumble in markets last week. Both our own Bank of England and the Federal Reserve Bank in the US expressed concern that the recovery from the recession was less robust than they had previously thought.

Shares nosedived on the news. One serious newspaper even published a recession supplement the following day. It all felt most unnerving but it was a short-lived wall of worry in the end.

In a way, that is surprising in itself. Economic news has hardly been encouraging recently. True, unemployment figures were more encouraging than we had any right to expect but the survey of employers that preceded them suggested worse is to come. Apparently two out of every three employers operating in the public sector expect to be laying people off before the end of the year. Given the noise over cuts emerging from Whitehall, this is hardly surprising.

Still, investors have taken comfort from the strength of company results. Last week, it was the turn of the life insurance industry, with the Pru, Aviva and Standard Life all turning in a good set of figures. Investment products are in demand, it seems.

Indeed, Standard Life’s investment boss, Keith Skeoch, was forecasting 6,000 for the FTSE 100 index before the end of the year. With investment sales strong, he could hardly say anything else.

But the fact remains that there is plenty of money around. What days like Wednesday last week demonstrate is that investors are still nervous and that safe havens are hard to find. That, and the fact that markets are very narrow these days. Even gold took a dip – and as for choosing which currency to back, has it ever been so difficult? The Japanese yen was in demand last week, rising to a 15-year high against the dollar. Yet the Japanese economy has been in trouble for decades.

The alternatives do not add up to much, though. Sterling? After Mervyn King’s comments and with interest rates so low, it does not look an attractive prospect. The euro? Not with the pressures current in the eurozone. The political will to keep the single European currency afloat might still be alive but solving the problems of countries like Greece, which reported a sharp contraction in its economy last week, will continue to overhang sentiment for the foreseeable future.

If there is one thing that makes the pound look attractive, it is the potential for problems to engulf the euro. Because this currency bloc is made up of sovereign states, each with their own issues and approaches to dealing with problems, it is easy to argue that a single monetary policy simply cannot work. This appears to be the view of George Soros, who published a paper on this very topic last month.

It happened to be George Soros’s birthday last week. This doyen of hedge fund managers has reached the ripe old age of 80. Born in Hungary in 1930, he fled the communist regime there and graduated from the London School of Economics before settling in America. His financial coups are legend and he still regularly publishes his opinions on current economic and financial issues. I imagine central bankers examine his views. Perhaps that is why they are so nervous at present.

Brian Tora is a consultant to investment managers, JM Finn &Co

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