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MARKETS HIT BY BROWN CONJECTURE

MARTIN SLANEY<br /><strong>HEAD OF DERIVATIVES, GFT</strong><br /><br />IS the recession over? The debate over whether the current stock market rally continues to rage. The good news on the economic front just keeps on coming and investors are lapping it up. The FTSE 100 is up nearly 30 per cent from its March lows on the perceived belief that the worst is behind us. Can the rally continue, or is the market about to experience a sharp dose of reality? <br /><br />&ldquo;Don&rsquo;t be fooled,&rdquo; we keep hearing from the bear market contingent. But the feel-good factor underpinning the rally has been stoked by a growing number of indicators suggesting the economy has turned a corner, and as long as that trend continues then I&rsquo;d rather be long. Last Wednesday&rsquo;s Purchasing Managers&rsquo; Index (PMI) was a clear case in point; it illustrated that the UK service sector actually grew in May. Sure, it might be a blip, but if we get a couple of months&rsquo; worth of data like this then it is not inconceivable that we will see a positive GDP figure as early as the second quarter. <br /><br />The PMI number wasn&rsquo;t alone in terms of economic encouragement for the UK last week. We have also seen improvements on the housing front, with both prices and construction jumping recently. House prices in fact are soaring at their fastest rate in nearly seven years. And Friday&rsquo;s non-farm payrolls data from the States, still seen as the number one market-mover in terms of global economic stats, was much stronger than expected. <br /><br />Nevertheless it&rsquo;s hard to deny that a correction, or at the very least a period of sustained sideways movement, is well overdue. Even in the good years stock markets have corrections. But with all the good news out there it was difficult until recently to imagine what could trigger this. <br /><br />However, if there is one thing you can be sure that markets don&rsquo;t like, then it is the old classic, uncertainty. And a good old-fashioned geopolitical scare can provide uncertainty in bundles; the latest is courtesy of the UK political situation. Will Brown resign? When? Will there be a general election? All such conjecture could certainly upset the market.<br /><br />Interest rates are the other potential skunk at the picnic, with more now believing that a rate rise could be on the cards, even before the end of the year. It all points to more uncertainty that I don&rsquo;t think is fully factored in just yet.