The froth in the stock market's glass

With the notable exception of retail price inflation, most of the economic news seems poor at the moment: growth is weakening, the trade gap is widening, and unemployment is on the rise again. This unholy trinity was seized upon by Labour as evidence of an economic weakness much greater than the Chancellor was letting on. The stock market plainly doesn't agree. Yesterday the FT-SE 100 reached an all-time closing high. Some of this has nothing to do with the economy. Buoyed by takeover fever following the bid for Fisons and the merger of Upjohn and Pharmacia, and uplifted by a rebound on Wall Street, the market is riding a tide of sentiment. But there are also more solid reasons for the revival in the City's spirits.

The slowdown revealed by yesterday's official statistics, together with the encouraging wage and retail price inflation figures last week, has changed the interest-rate story. Until the last few days, the question was whether the Chancellor could keep interest rates at 6.75 per cent. Now the City is looking forward to a cut in rates. The rise in gilts - the September futures contract rose two-thirds of a point on the day - undoubtedly helped the equity market.

The celebration may seem premature, given the real dangers of a more pronounced slowdown in the second half of the year. There is a considerable risk that the UK may repeat the US experience of a sharp inventory correction. The increase in stockbuilding helped to sustain growth in the second quarter; a rundown in the next few months will bring growth down. With a trend of flat investment and disappointing export performance, it doesn't take much to view the glass as half-empty.

But the City's clear preference to see the glass as half-full can equally well be defended. Even if there is a further slowdown in the next few months, this should be followed by a resurgence in growth. The world economy should benefit from the prospective further easing in US and German interest rates. This in turn will lead to increased exports. At the same time, the tightening of fiscal policy will come to an end next year, and the Chancellor can be relied upon to provide a further fillip with tax cuts despite his obvious lack of scope for doing so. For the moment the bulls have it. But the risks of a relapse still look worrying. The London market remains highly vulnerable to a correction on Wall Street, which begins to look all too possible. Froth in technology stocks is generally reliable evidence of an overvalued market.

Start your day with The Independent, sign up for daily news emails
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

Ashdown Group: Editor-in-chief - Financial Services - City, London

£60000 - £70000 per annum + benefits : Ashdown Group: A highly successful, glo...

Guru Careers: Pricing Analyst

£30 - 35k (DOE): Guru Careers: We are seeking a Pricing Analyst with experienc...

Ashdown Group: Treasury Assistant - Accounts Assistant - London, Old Street

£24000 - £26000 per annum + benefits : Ashdown Group: A highly successful, glo...

Ashdown Group: Sales Team Leader - Wakefield, West Yorkshire

£21000 - £24000 per annum: Ashdown Group: The Ashdown Group has been engaged b...

Day In a Page

Revealed: Why Mohammed Emwazi chose the 'safe option' of fighting for Isis, rather than following his friends to al-Shabaab in Somalia

Why Mohammed Emwazi chose Isis

His friends were betrayed and killed by al-Shabaab
'The solution can never be to impassively watch on while desperate people drown'
An open letter to David Cameron: Building fortress Europe has had deadly results

Open letter to David Cameron

Building the walls of fortress Europe has had deadly results
Tory candidates' tweets not as 'spontaneous' as they seem - you don't say!

You don't say!

Tory candidates' election tweets not as 'spontaneous' as they appear
Mubi: Netflix for people who want to stop just watching trash

So what is Mubi?

Netflix for people who want to stop just watching trash all the time
The impossible job: how to follow Kevin Spacey?

The hardest job in theatre?

How to follow Kevin Spacey
Armenian genocide: To continue to deny the truth of this mass human cruelty is close to a criminal lie

Armenian genocide and the 'good Turks'

To continue to deny the truth of this mass human cruelty is close to a criminal lie
Lou Reed: The truth about the singer's upbringing beyond the biographers' and memoirists' myths

'Lou needed care, but what he got was ECT'

The truth about the singer's upbringing beyond
Migrant boat disaster: This human tragedy has been brewing for four years and EU states can't say they were not warned

This human tragedy has been brewing for years

EU states can't say they were not warned
Women's sportswear: From tackling a marathon to a jog in the park, the right kit can help

Women's sportswear

From tackling a marathon to a jog in the park, the right kit can help
Hillary Clinton's outfits will be as important as her policies in her presidential bid

Clinton's clothes

Like it or not, her outfits will be as important as her policies
NHS struggling to monitor the safety and efficacy of its services outsourced to private providers

Who's monitoring the outsourced NHS services?

A report finds that private firms are not being properly assessed for their quality of care
Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

The Tory MP said he did not want to stand again unless his party's manifesto ruled out a third runway. But he's doing so. Watch this space
How do Greek voters feel about Syriza's backtracking on its anti-austerity pledge?

How do Greeks feel about Syriza?

Five voters from different backgrounds tell us what they expect from Syriza's charismatic leader Alexis Tsipras
From Iraq to Libya and Syria: The wars that come back to haunt us

The wars that come back to haunt us

David Cameron should not escape blame for his role in conflicts that are still raging, argues Patrick Cockburn
Sam Baker and Lauren Laverne: Too busy to surf? Head to The Pool

Too busy to surf? Head to The Pool

A new website is trying to declutter the internet to help busy women. Holly Williams meets the founders