Thin trading hits equities

The mood of last week was much like the one that prevailed the week before. A faint feeling of unease in equities has produced a fortnight of thin trading, where bad news has had an undue impact and good news largely ignored.

The mood of last week was much like the one that prevailed the week before. A faint feeling of unease in equities has produced a fortnight of thin trading, where bad news has had an undue impact and good news largely ignored.

But although it was a bumpy week in the City and on Wall Street, most strategists agreed that the market had not behaved at all unpredictably. The caution currently being exercised by some investors has meant that while there has been a steady flow back into technology, media and telecoms (TMT) stocks, most are cherry-picking the ones that look the most reliable.

Other investors are playing it even safer, and marching grimly back towards the sectors with the lowest exposure to the big economic worries of the moment.

That behaviour could, according to some analysts, be part of a fledgling trend which will eventually produce a tangible gulf between the various stocks within the new economy. The moment could come when investors divide the telecoms sector along "cyclical"- like Vodafone - and "anticyclical"- like BT - lines.

These worries were revisited last week as the US markets flew into another interest-rate panic. Two pieces of American data, GDP growth and employment costs, gave a strongly inflationary impression of the economy, and the markets became very gloomy about the prospects of back-to-back rate hikes in May and June.

The week was another rough one for Microsoft, as investors staged yet another sell-off on Monday, knocking a further 15 per cent off the company's value. The slump triggered some knock-on selling of other computer, software and internet stocks, driving Nasdaq down 4.5 per cent.

Back in the UK it was another very quiet week of company reporting, with few results having any impact on the wider market. On Thursday, however, property group Haselmere Estates made a cash offer for Scottish Metropolitan Property. Although the deal was fairly small by today's standards, some analysts feel that something bigger may be on the horizon.

News of Haselmere's offer prompted experts to run the slide rule over a number of consolidation candidates, including Land Securities, Delancey and Minerva.

In Japan, the week began strongly for equities. The benchmark Nikkei 225 index underwent a significant overhaul of its member companies. Unlike the FT-SE100 index, which renews its list of constituents on a quarterly basis and judges only by market capitalisation, this was the first big change in the Nikkei for ten years.

The 30 new stocks helped drag the Tokyo markets up from a 15-week low, though some profit-taking later in the week hauled the index back down again.

Although equities have held centre-stage of late, last week saw the spotlight move over onto the currency markets. The principal news was still closely focussed on the worsening trials of the euro.

The European Central Bank made its widely forecast quarter-point increase in interest rates on Thursday, and its pride and joy took another pummelling from traders. Against the dollar, the euro sank to within spitting distance of the critical level of 90 cents.

Derek Halperny, a senior analyst at the bank of Tokyo Mitsubishi, believes that the slide is all to do with confidence.

"There are plenty of factors that would normally point to buying the euro, but they are all being ignored," he said. "At the moment, there is nothing on the horizon that will turn the situation around."

But lurking behind the troubles with the euro were a few signs that even the mighty dollar could be in for some turbulence. For a long time it has maintained an impressive resilience to the volatility of the equity markets.

The global dominance of the US economy has also made the dollar a safe haven when emerging markets have gone haywire.

But the inflation worries that have hit the equity markets could soon filter through to currencies, and if there is a growing consensus that the Fed is not doing enough, some might see that as a reason to move out of the dollar as well as other US markets.