CHRISTMAS is close and there is a lot of Bah Humbug in the air. The FTSE 100 index is 5 per cent off its recent highs. The governor of the Bank of England Sir Mervyn King said that the economy may contract again. As inflation squeezes real wages, and public spending faces more cuts, it seems that there will be no pickup in real spending.
The situation doesn’t look that great abroad either. The Eurozone has fallen back into recession, and business surveys suggest that there is worse to come: both Germany’s Dax and France’s Cac 40 indices are down by over 4 per cent in the last month. The Troika (the International Monetary Fund, the European Commission, and the European Central Bank) still hasn’t agreed the terms for Greece’s bailout.
In the US, stock markets are down since the presidential election – the S&P 500 index has shed more than 10 per cent since September. The third quarter earnings season has also been disappointing. Politicians are talking the talk on resolving the fiscal cliff. But every day they prevaricate, investment is put off by companies – worried by the uncertainty.
The picture isn’t any better in Asia. After contracting by 0.9 per cent in the third quarter, Japan’s economy looks set for another recession. The government is desperately trying to free the country from its deflationary spiral. However, after mounting pressure from opposition parties, which want the Bank of Japan to ramp-up the printing presses in an effort to engineer inflation, elections have been called.
Over in China, investors are concerned that the new leadership, unveiled last week, will not be able to overcome vested interests to rebalance the economy, and keep growth within the range of 7 to 8 per cent.
It sounds more like Bleak House than Festive Cheer. But things are rarely as bad as feared, and if I were a trader, I might think that a lot of the negative news has already been priced into the market.
The biggest gains are likely to stem from a deal that neutralises the threat of the fiscal cliff. It is likely that Greece will get the next tranche of its bailout. It is unlikely that China will change its policy over the short term, but the upshot is that the country should remain on course for growth of 7.5 per cent. Sentiment could also be buoyed by the fact that Japan is, at the very least, prepared to try anything to kick start growth.
Stick around. It may still be OK for Santa.
Ross Westgate co-hosts Worldwide Exchange daily from London and anchors Strictly Money on CNBC