The markets had their best week in almost three months last week. The FTSE 100 index rose for four straight days. I wouldn’t bet on it doing the same on a fifth, but who knows? History shows Mondays are more likely to see a rising market than later in the week.
A rising tide raises all ships, so Thomas Cook benefited. An 8% fall in its share price on Friday still left the group almost 25% up on the week. But don’t get carried away: the shares opened this morning at just under 44p a pop. Thomas Cook remains absurdly undervalued, but its shares probably won’t pick up until the group has a decent trading update and full-year results under its belt, along with a new chairman and new chief executive – i.e. by late November at the earliest.
What is going on in the markets? The correlation in movement of the biggest US stocks has, in recent days, been at its highest since the stock market crash of October 1987 – meaning share-buyers are spooked and stampeding first one way, then another. HSBC chief economist Stephen King has suggested this is because: “Investors are desperately trying to find pockets of safety in a world where the financial system appears to be crumbling.” (Financial Times, September 9).
The rise in share prices at the end of last week was triggered by a surprise move by central banks to pump money into Europe’s banking system on Thursday. My guess is this will prove short term. Those investors who poured in on Friday will cash in and bail out. The central bankers’ action smacked of “desperation”, according to one analyst. The last coordinated action of this kind came in September 2008 and we all know what happened then.
There is a good deal for central banks to be desperate about. Greece is close to a default on its debt, which could trigger a fresh financial meltdown. Indeed, there is a view that the central banks’ action last week was to prepare the way for this. The cash injection will be available early in October, timed – it is suggested – to bolster the banks in the aftermath of Athens’ default sometime between now and then. Add in stagnation in the US, a slowing German economy and a recession in Japan and the world is in a stew.
The current market volatility is captured in these few lines from the Financial Times of September 13, the first of those four days of rising share prices. I quote from the introductions to leading articles on three pages: “Investors are panic-stricken about the future of the euro”; “Time is running out for Greece”; “Stocks in Europe tumble to 27-month lows”.
Inside, a senior economic advisor to Swiss investment bank UBS, George Magnus, warned: “Our economic predicament is not a temporary or traditional condition. The economic model that drove the long boom from the 1980s to 2008 has broken down.”
Two days later we learned of the arrest of a ‘rogue trader’ at UBS, who is accused of creating a $2 billion hole in the bank’s finances. It is not only governments at risk of default. UBS has already technically failed once in this financial crisis and, like so many UK banks, been bailed out. (The austerity measures we must now endure to balance the government books are a major reason Thomas Cook and other travel companies are struggling to sell as many holidays as in the past to strapped UK consumers.)
A gathering of European finance ministers in Poland on Friday received “a scolding” by US Treasury secretary Tim Geithner, who urged them to ‘stop bickering’ and suggested: “Governments and central banks have to take out the catastrophic risk from markets.”
This is pretty rich on two counts. First, the markets took the risks. Why should tax payers bail them out? Second, Geithner was one of the architects of the catastrophe. Geithner was an enthusiastic proponent of derivative trading at the US Treasury through the 1990s where, as an assistant secretary, he opposed attempts to regulate such trading.
His demand for Europe’s leaders to show political decisiveness is irrelevant. The indecision is global and stems as much from differing interests as from disagreements about the way forward. China has little reason to agree with, or support, US or European policy needs.
Within the EU, German interests are not necessarily those of France and certainly not those of the weaker EU states. The divisions became obvious a week ago with the abrupt resignation of Germany’s representative on the board of the European Central Bank. In the US, Democrats and Republicans – president and Congress – could barely agree a budget this August and will have to repeat the process next year.
At the same time, there is resistance to the austerity measures that are the universal prescription of governments. This is most evident in Greece and is the reason Athens struggles to impose the loan terms it has agreed with the European Central Bank and International Monetary Fund. Were the spirit of the ‘Arab Spring’ to enter Europe, it would most likely do so through Greece.
In the meantime, at the end of November, something of the spirit of Greece will come to the UK in the form of a one day, public-sector general strike following the Chancellor’s autumn budget statement.
The only thing that is certain is that the chorus of demands for quantitative easing (QE) will grow. Since in the UK this would be the second round of QE, it has already been christened QE2. Even supporters of the idea point out the first £200-billion injection by the Bank of England (QE1) achieved little other than to fuel inflation. A study by investment bank Goldman Sachs suggested the main impact was to push fund managers into investing in “more risky assets”.
It had little effect on bank lending, which was supposed to be the point. That might lead you to conclude there is little value in a repeat, but it leads QE supporters to conclude it’s worth another punt precisely because it failed first time.
Where does this leave the travel sector? The industry will have to deal with an open-ended period of financial instability and economic stagnation (or worse) involving government austerity, a household-spending squeeze, political uncertainty and social unrest. I would say that means organic growth, expansion and IPOs are ‘out’ and cash control and caution – and the odd distressed acquisition or merger – are ‘in’.