View from City Road: Confidence won't return quickly

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The Independent Online
THE FTSE-100's boorish 105.6-point jump amid the ruins of Government strategy needs to be put into perspective. Since hitting a low in late August the market has now risen by 10 per cent.

But at 2,483.9 the FT-SE 100 remains 10 per cent below the May peak of 2,737.8 which it hit in the euphoria of the Conservative election victory. The economy may have gone downhill since then, but back in May investors who were taken in by 'Boom] Boom] Britain' propaganda really believed that consumer confidence would soar and lift activity with it.

The question is - do you feel as confident now as you did then? If not, then the market may be slow to haul itself back to May's dizzy heights.

Household confidence must have been rattled by the Government's humiliation at the hands of the foreign exchange market. Consumers have been told repeatedly that devaluation is a bad thing and they must be apprehensive.

However, any devaluation is ultimately inflationary. Fears of rising inflation may conceivably give a kick-start to spending on the high street. Already Stanley Kalms, chairman of Dixons, has been on television with warnings of higher prices to come.

A near-term cut in base rates is essential to rebuild shattered consumer confidence. The stock market has mentally factored in a cut to 9 or even 8 per cent eventually, and there will be disappointment if this does not happen.

Investors may have short memories, but few want to be caught wrongfooted a second time in six months. After the initial euphoria they may wait for evidence of a boost before pushing the market much higher.

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