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Rates speculation adds spice to market's sleepiest month

By Jeremy Stewart

Published 11/08/2015

Janet Yellen, chair of the board of the US Federal Reserve, which is also considering increasing rates
Janet Yellen, chair of the board of the US Federal Reserve, which is also considering increasing rates

In the London markets, August is by far the quietest month, with the lowest trading volumes of the year. I even heard tumbleweed mentioned at the end of last week, but that is a bit of an exaggeration. However, it is true that the only real recent London news of any import was that the Bank of England Monetary Policy Committee decided not to change interest rates.

There are some early signs of a change on the way, as the decision was not unanimous. External factors have kept downward pressure on inflation, thus keeping the Bank more relaxed about not exceeding their 2% target for the measure.

In the United States, on the other hand, strong job growth is now such that even a dovish member of the Federal Reserve's Open Market Committee said that it would take a significant deterioration in the data to convince him not to move interest rates in September. That could be the start of it.

Closer to home, there was good news for Ireland. On Friday, Fitch lifted its rating outlook to positive, citing the very strong growth figures. Ireland is on course to have the highest growth in the euro area for the second year in a row. Many now believe that the more important Moody's rating will also be upgraded on September 11.

The economic progress has also been reflected in the Irish Stock Exchange, the ISEQ. Although dominated by a small number of companies, the ISEQ has risen from a low of just under 2,000 in the midst of the crisis in 2008 to its present level of over 6,500. Investors have seen strong returns. Indeed, even over the past five years the ISEQ has significantly outperformed the main UK and US markets.

But there is a sting in the tail. The exuberance of 2006 and early 2007 saw the index at 10,000, meaning that investors who went into the market at that time are still sitting on heavy losses. Outside of those years, however, longer term investors are in profit.

What this period also demonstrates is that, generally, the real losers are those that sell after significant falls. Holding cash since that period would have meant that losses would have been 'locked in', whereas staying in the market saw much greater recovery.

As the holiday season continues, it is good to see that at last there are signs that the price of petrol and diesel are coming down. Last week saw oil stay below $50 a barrel and there was even speculation of a forecourt price war. It will have to be a quite an intense war if forecourt prices are to drop by anything like the price of oil.

It is often while relaxing on this year's holiday that our thoughts turn to next year's. With little sign of significant upward pressure on the oil price in the short-term, maybe the airline forward contracts will see some benefit passed on to us in the form of lower air fares for next year's trip?

Jeremy Stewart is head of wealth management and private banking at Danske Bank

Belfast Telegraph

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