The Looming Liquidity Crisis

By Heather D'Alton Dec 14, 2005

*** Tate & Lyle joins the Dutch

*** The pressure's on Sportingbet...

*** House price inflation down...the 'lethal cocktail' of inflationary waves...are bonds the most attractive asset class around?...

      -------------------   – It's not only the Dutch who aren't too fond of the EU...sugar group Tate & Lyle's shareholders weren't too happy about the EU's move to slash sugar prices on the continent. Tate's share price fell 4% - to close as the top blue chip loser.

– The EU – which has up to now illegally pushed subsidised sugar onto the world market, according to the World Trade Organisation – will reform its laws later in June, in a move which could knock European sugar businesses. Moreover, T&L's pre-tax profit also fell some 12% to £200m – as the group paid a £55m fine to settle a civil case in America. Its shares closed 20p down at 465p.

– The FTSE 100 closed 6 points down on Thursday, at 5,005. The mid-cap 250 index continued its climb, trading 0.3% up at 7,169p. The All Share index fell 0.04%.

– 'At the moment people are concerned about economic slowdown, oil prices being higher than expected,' said Brown Shipley's John Smith. 'Stocks are not cheap, they're fair value now and because of that there's not much upside.'

– And talking about Wednesday's 'Nee' vote, it failed to bring down the region's stock markets yesterday. Both Germany's Dax and the Cac 40 in Paris closed 0.1% in the black. The volatile euro gained 0.6% versus the dollar, to trade at $1.227 by London's close. Yet besides the volatility in the region's currency, will the no votes turn out to be a financial catastrophe for Euroland?

– The gamblers performed well on Thursday: William Hill closed as a top gainer, up 3%, on rumours it was finalising its deal to buy betting shops from Stanley Leisure.

– Meantime online better Sportingbet said its pre-tax profits for the three months to May tripled, from £4m to £14m, following its acquisition of Paradise Poker. Turnover also rose from some £300m to just under £400m. So why did the group's share price fall 5% yesterday?

– It may have had something to do with rival PartyGaming's plans to float up to 23% of the company on the LSE sometime in June. It hopes to attract a value of £3bn – which should put the stock straight into the FTSE 100.

– And house price inflation slowed to its weakest pace in 9 years last month, according to building society Nationwide yesterday. House price rose 0.3% in May – bringing the annual increase to 5.5%. This is the lowest since August 1996, and is down from 7% in April. See below for more on UK houses.

-------------------    – What will happen to 'consumer spending when taxes pick up and housing prices decline further?' asks Mike Shedlock in Whiskey & Gunpowder. As it is, UK housing appears to be teetering 'on the brink'. So what has the Chancellor done in order to keep the bubble alive?

– He's doubled the stamp duty threshold to £120,000...an 'act of futile desperation'. 'Does it really make sense to keep encouraging people to spend money they do not have on overpriced assets they cannot afford?' asks Shedlock. Moreover, when the recession hits the UK, how long before it spreads across the pond to America?

– When the Nasdaq collapsed some 60% from early 2000 – as liquidity fled the tech stocks when the bubble burst – all that money simply moved from one kind of equity to another: in this case partly into the Dow Jones Wilshire 5000 (WLX), says Dan Denning in Strategic Investment. So for the past three years the WLX has gained over 40% - a 'liquidity-driven rally' which has lifted the index to around 11,500. But has that rally now reached its technical limits? And could this liquidity crisis simply make credit, and capital, vanish altogether?

– With all the inflationary pressures we are faced with; rocketing commodity prices, rather low interest rates (pretty much globally) and costly wars (US and UK), the combination should result in a 'potentially lethal cocktail' of inflationary waves, says the Absolute Return Newsletter. So it's surprising that this has not been the case.

That's because a number of deflationary forces have remained intact. And these deflationary forces will have a negative impact on European equity markets. So what does this mean for investors? Quite simply that long-dated bonds 'cold turn out to be one of the most attractive asset classes over the next 12-18 months'.

Published in | More articles by Heather D'Alton

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