Are retailers heading for a grim Christmas?

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Stock markets rose strongly yesterday, as Federal Reserve chief Ben Bernanke - entirely unsurprisingly - didn't quash hopes of a US interest rate cut happening next week.

So far investors are hoping that the current crisis will be contained to the financial' markets, and won't spill over into the real' economy. They hope we'll see a repeat of 1998, when Alan Greenspan's bail-out of stricken hedge fund Long-Term Capital Management helped inspire a final two-year blowout in equities, before the dotcom crash of 2000.

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But it may not pan out like that this time. For a start, the real' economy is already in a lot of pain. Consumers are really feeling the squeeze - the Citizens Advice Bureau is handling 6,600 debt enquiries a day, a record.

And it's only set to get worse

UK consumers are running into trouble as a combination of rising costs and tighter lending criteria squeeze their resources. Doorstep lender Provident Financial said that more people are borrowing money from the company for the first time in three years. It blames rising fuel and food prices.

That's an interesting line that Provident has taken there. Food prices certainly have gone up substantially in the last year or so. However, fuel bills - and household energy bills in particular - have been rising for quite some time. So while higher costs are clearly part of what's driving consumer demand for borrowed money, why are these consumers going back to Provident? What's happened on the supply side?

The reality is that Provident is regaining business from people who once - in the good old days of free and easy credit - would have been able to borrow more cheaply from mainstream lenders. But mainstream lenders, who are seeing bad debts soar, are now no longer willing to give money to just any Tom, Dick or Harry who walks through their door. Borrowers will find that even Provident is no soft touch - it rejected seven in 10 applications for credit cards in the past six months, and 50,000 loan applications.

It's not just getting harder for subprime' loan applicants to get money though. Costs are rising for everyone, from consumers to small businesses. Mortgage borrowing costs "jumped" last month, says The Times, according to the latest Bank of England data. "The Bank found that the average cost of virtually every type of mortgage product rose" last month. Banks and building societies are now charging an average 7.69% on a standard variable rate mortgage - the highest its been since 1998. And in 1998 of course, we had much lower debts, and much lower house prices. "This is bad for economic growth," said George Buckley, UK economist at Deutsche Bank.

Meanwhile, Commercial First, a leading provider of mortgages to businesses raised its prices by one percentage point - a third of a point rise was previously expected. According to The Telegraph, marketing director Stephen Johnson said that conditions in the mortgage market were "without parallel", and that tighter borrowing criteria would hit "the wider economy", making it "harder for the small and medium-sized enterprise to raise the capital they need to invest."

With every part of the real' economy being squeezed, it seems unlikely that businesses can escape unharmed. Already the retail sector is under a cloud - Next warned yesterday that the summer had been tough, but that business was likely to get even tougher, as the full impact of higher interest rates hit consumers "in three to four months' time." Meanwhile, sportswear chain JJB Sports issued a profit warning, sending shares down 14%, while French Connection - hardly a star performer at the best of times - reported a 1.6% fall in like-for-like sales.

The trouble is - as we've pointed out here before - that the recent consumer boom has been fuelled by the innovative use of credit derivatives in the financial' economy filtering through to the real' economy in the form of easy lending. Now that this innovation has gone badly wrong, the easy lending has dried up. You can't take away the driver behind the boom and then expect not to get a bust.

The real economy is already suffering - and the worse things get in the credit markets, the worse it will become out here'.

Turning to the wider markets

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London stocks ended yesterday with good gains after Bernanke's speech did nothing to subdue hopes of a US rate cut. The benchmark FTSE 100 index was up 146 points to 6,280 and the broader FTSE 250 was also higher. The financial sector was the day's strongest performer, led by Barclays. For a full market report, see: London market close.

Tuesday was a brighter day for stocks on the Continent too. The Paris CAC-40 was up 92 points to 5,478, with power engineering firm Alstom leading the gains on reports of a possible tie-up in the sector. In Frankfurt, the DAX-30 was 82 points higher, at 7,457.

On Wall Street, the Dow Jones added 180 points to close at 13,308. Auto stock General Motors rose over 4% on its announcement that it was spending less on incentives for buyers, whilst fast food retailer McDonalds gained on a strong rise in August sales. The tech-rich Nasdaq was up 38 points to 2,597. And the broader S&P 500 was 19 points higher, at 1,471.

In Asia, investors in Tokyo were initially cheered by news that PM Shinzo Abe is to resign, but political uncertainty saw the leading Nikkei index end 80 points lower, at 15,797. In Hong Kong, the Hang Seng was up 366 points, at 24,319.

Crude oil futures were trading near an all-time high this morning, at $78.10 a barrel. And Brent spot was at $76.47 a barrel.

Spot gold had edged closer to a sixteen-month high this morning, last trading at $712.90. Meanwhile, silver was at $12.73.

In the currency markets, the pound hit a one-month high against the dollar this morning - $2.0336 - before falling back to 2.0304. The pound was steady at 1.4673 against the euro. And the dollar was at 0.7221 against the euro and 114.07 against the yen.

And in London this morning, commercial broadcaster ITV announced plans to expand its TV production and internet operations in order to attract more viewers and advertisers. The company has set targets such as doubling content revenue to £1.2bn by 2012 and generating £150m of online revenue by 2010. Chairman Michael Grade said he wanted the broadcaster to be acknowledged as 'the UK's favorite source of free, original entertainment across all popular platforms and devices'. ITV shares had fallen by as much as 1.2% this morning.

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