No crash but equities are in for a rough ride

COMMENT: `For a moment, it looked as if fear was getting the upper hand. A mere statistic was enough to lead to a dramatic change in perceptions about which way interest rates in the US are heading'

The world changes and markets change alongside it but the forces that guide and mould them do not. Economic fundamentals are only part of the story here. They both affect markets and are affected by them. But primarily it is the psychological factors of fear and greed that drive stock markets. They always have done, and always will do. The secret of stock market prediction, therefore, is correctly to read when the one is going to take over from the other.

For a moment there, it looked as if fear was getting the upper hand. A mere statistic - the US equivalent of our own unemployment figures - was enough to lead to a dramatic change in perceptions about which way interest rates in the US are heading. More cuts had been confidently expected, further fuelling this extraordinary bull run in equities. Now, with the US economy apparently heading for overkill, the expectation has swung 180 degrees; the next move will be up, not down, everyone is saying. Disaster - well, on Friday at least. With a weekend to sleep on it, the pundits are now not so sure. Wall Street was like a yo-yo yesterday, not knowing which way to go, and the situation looks harder to read than ever.

For what it is worth, here is the bear case for London equities. Let us assume that US interest rates are at the very least now on hold with the likelihood being that their next move is upwards. Despite the pause for breath yesterday, that cannot be anything other than bad news for US Treasury bonds. If they go lower, gilts will go lower too, for bond markets are global nowadays and tend to move in tandem so that national differentials are maintained. Given that London equities are already expensive relative to gilts, any adverse reaction in gilts is going to cause shares to tumble.

Kenneth Clarke, the Chancellor, wants to see at least another half-point fall in British base rates. He believes that this is not only possible but also justified by the data. In the past he has been lucky and things have swung his way. Increasingly isolated in the Cabinet over Europe, his luck may now be running out. It is going to require an extraordinary and wholly unforeseen change in international and domestic economic conditions for him to justify that extra half point. Enfeebled though the Bank of England might be, the Chancellor is not going to be allowed to get away with it.

The other factor that has been holding up the London equity market, takeover fever, is also fading fast. There are still plenty of deals in the offing, but there is also a great deal of hesitation. Unsettled markets - worse, markets that could fall heavily - are a bad backdrop for deal-making. Political uncertainty is adding to the "wait and see" mentality. Who knows when the general election might be, but the odds are fast shortening on the autumn and if that is the case, there are not going to be any big takeovers after May.

All things considered, then, things do not look good for London equities, not good at all. Wall Street's mini-correction should not be written off lightly. It seems unlikely that we are heading for a crash similar to the one that afflicted world markets in 1987, but this year's bull market certainly looks to be over.

All the high street in a hypermarket

Petrol, Post Offices and now Sketchley dry cleaners. The big supermarket chains, in their search for new lines and sources of profit, continue their assault on the traditional preserve of the high street.

As it retrenches, with the closure of 160 branches, Sketchley is expanding out of town by opening an unspecified number of branches in Sainsbury supermarkets. Presumably it is only a matter of time before betting shops, travel agents, estate agents, and building societies are all there too, available at your local hypermarket. Why, it cannot be long before we are all nipping down to Sainsbury's for a pint as well.

The decline of the high street and the ever onwards and upwards march of the big supermarket chains is a long established trend, but we are surely witnessing something new here. In part, it is the decline of the high street brand name. Sketchley still has an upmarket ring to it, but on the whole it is perceived as just another bog-standard dry cleaner, to all intents and purposes indistinguishable from the one next door. But it is more than that. In an increasingly competitive world, it is also about the need to share costs and overheads. Furthermore, purveyors of specialist services need to go where the customers are. These days it tends to be the supermarket, not the high street.

Small businesses are a big election issue

Michael Heseltine, champion of small firms in his competitiveness drives when at the Department of Trade and Industry and now the Cabinet Office, was a distinguished absentee from yesterday's small business conference in London to launch a package of new policies for the supposed benefit of the entrepreneur. This perhaps was not too much of a surprise, since he would have risked a barrage of questions from the floor about his own admission that he had been a bad payer in his early business career.

But leaving aside Mr Heseltine's embarrassment at losing the initiative on an issue dear to his heart - the competitiveness of small firms - the real significance of yesterday's package was not the individual measures. It was the fact that the Prime Minister has taken over presentation of the policy.

According to a DTI minister, Mr Major's interest had an immediate impact inside Whitehall, where log-jams started breaking. The most obvious example was his insistence that another look should be taken at enforcing disclosure by large companies of their late payments record. Only a few months ago, employers had successfully shot down this proposal and persuaded the Government to accept the second-best option of publication of companies' payment policies.

The statutory instrument enforcing disclosure of corporate policy went through the Commons only in January, but already it is looking out of date. Policy is one thing, practice often quite another. The policy statement compromise always did look unsatisfactory.

Most of the new measures for small firms, including those on late payment, are far from final decisions and must go out to consultation to see if they will work. But whereas in the past this formula has more often than not been a prelude to shelving anything remotely controversial or difficult, the Prime Minister's involvement tells a different story.

Small business is becoming an election issue, because of its impact on growth and the large number of jobs it creates. Next week, Tony Blair is to introduce a Labour conference on small business at which many of the personalities at Mr Major's jamboree will resurface, along with their shopping lists for government action.

Anybody with a decent idea for improving the lot of small business will be pushing at an open door over the next few months, as the two parties try to outdo each other. In the policy field, small businesses have never had it so good.

Start your day with The Independent, sign up for daily news emails
Sport
sportWWE latest including Sting vs Triple H, Brock Lesnar vs Roman Reigns and The Undertaker vs Bray Wyatt
Arts and Entertainment
Louis Theroux: By Reason of Insanity takes him behind the bars again
tvBy Reason of Insanity, TV review
Arts and Entertainment
Cassetteboy's latest video is called Emperor's New Clothes rap
videoThe political parody genius duo strike again with new video
Arts and Entertainment
tvPoldark, TV review
ebooks
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Retirement Coordinator - Financial Services

Negotiable: Recruitment Genius: To provide a prompt, friendly and efficient se...

Recruitment Genius: Annuities / Pensions Administrator

Negotiable: Recruitment Genius: You will be the first point of contact for all...

Ashdown Group: HR, Payroll & Benefits Officer - Altrincham - up to £24,000.

£18000 - £24000 per annum + benefits: Ashdown Group: HR, Payroll & Benefits Of...

Ashdown Group: Learning and Development Programme Manager

£35000 - £38000 per annum + benefits : Ashdown Group: A highly successful, int...

Day In a Page

No postcode? No vote

Floating voters

How living on a houseboat meant I didn't officially 'exist'
Louis Theroux's affable Englishman routine begins to wear thin

By Reason of Insanity

Louis Theroux's affable Englishman routine begins to wear thin
Power dressing is back – but no shoulderpads!

Power dressing is back

But banish all thoughts of Eighties shoulderpads
Spanish stone-age cave paintings 'under threat' after being re-opened to the public

Spanish stone-age cave paintings in Altamira 'under threat'

Caves were re-opened to the public
'I was the bookies’ favourite to be first to leave the Cabinet'

Vince Cable interview

'I was the bookies’ favourite to be first to leave the Cabinet'
Election 2015: How many of the Government's coalition agreement promises have been kept?

Promises, promises

But how many coalition agreement pledges have been kept?
The Gaza fisherman who built his own reef - and was shot dead there by an Israeli gunboat

The death of a Gaza fisherman

He built his own reef, and was fatally shot there by an Israeli gunboat
Saudi Arabia's airstrikes in Yemen are fuelling the Gulf's fire

Saudi airstrikes are fuelling the Gulf's fire

Arab intervention in Yemen risks entrenching Sunni-Shia divide and handing a victory to Isis, says Patrick Cockburn
Zayn Malik's departure from One Direction shows the perils of fame in the age of social media

The only direction Zayn could go

We wince at the anguish of One Direction's fans, but Malik's departure shows the perils of fame in the age of social media
Young Magician of the Year 2015: Meet the schoolgirl from Newcastle who has her heart set on being the competition's first female winner

Spells like teen spirit

A 16-year-old from Newcastle has set her heart on being the first female to win Young Magician of the Year. Jonathan Owen meets her
Jonathan Anderson: If fashion is a cycle, this young man knows just how to ride it

If fashion is a cycle, this young man knows just how to ride it

British designer Jonathan Anderson is putting his stamp on venerable house Loewe
Number plates scheme could provide a licence to offend in the land of the free

Licence to offend in the land of the free

Cash-strapped states have hit on a way of making money out of drivers that may be in collision with the First Amendment, says Rupert Cornwell
From farm to fork: Meet the Cornish fishermen, vegetable-growers and butchers causing a stir in London's top restaurants

From farm to fork in Cornwall

One man is bringing together Cornwall's most accomplished growers, fishermen and butchers with London's best chefs to put the finest, freshest produce on the plates of some of the country’s best restaurants
Robert Parker interview: The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes

Robert Parker interview

The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes
Don't believe the stereotype - or should you?

Don't believe the stereotype - or should you?

We exaggerate regional traits and turn them into jokes - and those on the receiving end are in on it too, says DJ Taylor