The Exceptional Conditions Virus

By Heather D'Alton Dec 14, 2005

*** Good news for retailers

*** Morrison shows progress *** Why bonds will rise...the rampant exceptional conditions virus...what next for the FTSE?...and more       

-------------------   – Retailers haven't had much luck of late, what with the high street straining from the consumer's empty wallet.

– So it's about time that something went right for them – and it came in the form of the Bank of England's Monetary Policy Committee (MPC), who it now seems are increasingly vying for an interest rate cut.

– According to the minutes of the June rate-setting meeting, two dovish members called for rate cuts – a first since July 2003 and a turnaround from last month's call for a rate hike, albeit from one member.

– No wonder then that the retail sector traded 2% higher on Wednesday. Next closed as the top blue chip gainer, up 3%, while Marks & Spencer added 2%. And electricals retailer Dixons Group also closed 3% in the black, despite warning that its margins are under pressure – especially in the UK – after price-cutting led to a 9% fall in operating profit. Pre-tax profit however rose 4% to £345m.

– Morrison also traded some 2% up – and has now gained just under 4% over the four trading days. So what's going on at the struggling retailer, which has issued five profit warnings since buying Safeway last year? Well, investors seem pretty chuffed that Sir Ken Morrison has finally succumbed to calls to appoint three new non-executive directors, effectively ending his authoritarian regime at the supermarket. But this means his days at Morrison could be numbered...

– Meantime, the blue chip index closed at new three- year highs yesterday, up 17 points to 5,099. The FTSE 250 traded 0.5% up at 7,343. And the All Share index added 0.4%.

– Banks also took heart from the MPC's minutes, with lower interest rates easing the concern on bad debts. Barclays, HSBC and the Royal Bank of Scotland have all recently warned that customers would find it increasingly hard to repay their debts. Yesterday the sector gained 1.5%, with Barclays up 2% and HSBC 1% in the black.

– Standard Chartered couldn't follow its peers up on Wednesday, slipping 2% after issuing a flat trading statement. According to the Asia-focused bank, net interest margins in both India and Singapore have come under pressure, which accounts for more than 20% of its pre-tax profits.

– And the pound traded 0.4% lower versus the dollar on Wednesday, at $1.821, following the MPC's dovish report. It slipped 0.1% against the euro, to trade at 1.503 euro to the pound.        

-------------------    – Those analysts that reckon that longer-dated bonds cannot continue their current strength are very wrong, says Martin Spring in his newsletter On Target. Instead for the time being bonds will continue to make good returns for investors. Why? Because much of Asia buys US dollars – in order to keep the dollar artificially low – then invests those dollars in low-risk government bonds. The result? Well, while there's a dollar surplus, a paper shortage is developing, so bond values are being driven up.

– Some people are worried about the spread of bird flu virus. The real question is: Is anyone paying attention to the rampant spread of 'exceptional conditions' amongst EU members? asks Mike Shedlock in Whiskey & Gunpowder. Italy obviously has it, as it faces an alleged 'soft recession'; Germany has it, as it plays its 'reunification card'; and what about France? Does a shortage of brie warrant the French a reprieve?

– The company directors obviously know something about their companies that the ordinary investors aren't aware of: unusually, the number of director share sales exceeded purchases in the second week of June – an accelerating trend, we note in the new issue of MoneyWeek. Despite this, FTSE 100 forecasts are very positive: a number of analysts reckon the blue chip index will rise some 8.5% in 2005. But are they right?

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