is, what crisis ? The FTSE 100 starts trading this week at 5,900 after rising over three per cent last week. It was up six of the past seven trading days. We’re now above the levels before the Japanese earthquake, we still have rising Middle East tensions, an unresolved European debt crisis, and an inflation problem that could strangle Britain’s economic recovery before it’s really started. Two weeks ago, pessimism reigned and now we’re facing a chorus of optimism, so what’s going on?
First of all, I’m inclined to follow the advice of CNBC contributor Doug Kass and avoid all this noise. Things were never as bad as the pessimists believed – but nor are they as good as the optimists would have us believe.
Lena Komileva at Brown Brothers Harriman described last week as the un-pricing of Japan’s triple shock across global asset prices. This has also prompted a return to the global correlation of markets. Dollar down, risk assets up – backed up by central bank liquidity and strong corporate balance sheets.
Helping this “risk trade” has been the reaction of the global authorities to events. After the stupor of a decade of G7 inaction, the concerted move to stem the yen’s rapid ascent was a real surprise. This came in the same 24 hours that the UN once again became relevant with its action in Libya. Suddenly, investors got the sense that authorities can indeed rise to the challenge. Even the ECB’s policies can be seen in this light. You might disagree with its looming rate rise – but it could be argued that at least the bank is being strong on its mandate and showing a resolve to act, an action which says “we’re in control”.
But this sense of control may prove costly. As Komileva says, “at this juncture, with so much confidence invested in beliefs that global policy will prevail over local risks, the risk from a potential policy mistake is huge.”
That’s why the debate about what the Bank of England should do is key. I’ve written before in these pages about the risks of a rate rise but I absolutely agree with the damage that higher inflation can and already is doing to the economy. It’s also why if the OBR’s projections for UK growth, especially in 2013 and 2014 turn out to be too optimistic, the government will need a Plan B.
Until now stock investors have been buoyed by corporate profit growth and supportive global policy. I’d suggest the former is peaking and the latter is uncertain. That makes us, in the words of Doug Kass, “still hostage to more adverse developments.”
Ross Westgate hosts Strictly Money and co-hosts Worldwide Exchange daily on CNBC.