The buoyant tone of markets was shattered for me this morning when I was informed of some sad news by my computer:
“A fatal error has occurred in Outlook.”
Errors are costly, and presumably fatal ones carry the highest cost of all. With news of the fatality still weighing on me, I felt unable to face the additional consequences until I had at least identified the victim and informed the family. But, as a call to the IT helpdesk yielded no results, this posting will have to serve as my own tomb of the unknown email casualty:
“The data in your envelope has been lost…”
My shock at this second quick-fire bombshell was tempered by the fact that part of the appeal of email has always been its lack of reliance on envelopes. But further consolation was at hand:
“…but your document is still available.”
On such a sad day only someone devoid of all feeling would take heart at the availability of a document. Nevertheless we must be grateful for small mercies.
Such has been the attitude of the markets (he adds, tenuously) in the weeks traversing 2011 and 2012. Whilst the economic news has turned soft – US consumption remained weak, house prices are still falling and fourth quarter earnings growth was its softest for three years - investors continue to unfurl the Andrex rally: soft, but strong and very, very long.
The reasons are twofold:
- The vast improvement in payroll data (beating expectations and seeing upgrades to previous numbers) trumps any minor weakness in PMI or such other tedium. Employment growth should feed through to higher consumption, stability in the housing market and eventually a boost to earnings growth.
- The main worry of the markets, financial Armageddon has been, not so much kicked down the road, but launched down the motorway, through the benevolence of the European Central Bank’s Long Term Refinancing Operation.
The scheme, which allows banks to exchange unmarketable assets for crisp clean cash, is the equivalent of a continental Cash Converters. It has been boosted by the news that collateral requirements have been selectively reduced (that moth-eaten taxidermy squirrel we asked you to leave outside in December? This month we’ll lend you a fiver against it).
And this benevolence is in exchange for the good intentions of European states who seem set to ratify the Reinforced Stability & Growth pact to varying degrees. While they continue to shuffle in the direction of fiscal consolidation the ECB will keep the cash flowing.
Until we see that fiscal consolidation in action, and see countries boosting competitiveness rather than just cutting spending, investors should be cautious about expecting Europe to return to growth. But worrying about profitability is for another day, even solvency is an afterthought. The Andrex rally is driven by liquidity and will continue while there are still investors willing to “tear a square” and get involved. GUY FOSTER