Most of the world's markets have gone precisely nowhere this year. Japan's Nikkei 225 index is up 10% in 2004, thanks to growing confidence in the sustainability of Japan's economic recovery, and eastern Europe has soared as its accession to the EU highlighted its attraction as a convergence play. But Germany's Dax, America's S&P 500 and Britain's FTSE 100 indices have barely budged as positive earnings news has been overshadowed by jitters over terrorism, oil prices and the prospect of rising rates. So what might get them moving in the second half?
When it comes to the FTSE, that's a tricky question, says Christian Schubert in the Frankfurter Allgemeine Zeitung. Merrill Lynch notes that consumers are spending more of their disposable income on servicing debt than at the peak of the last two economic upswings. That, along with likely further rate rises, bodes ill for consumption and growth. Meanwhile, recent corporate newsflow "offers few reasons to be cheerful", says www.Dailyreckoning.com. According to Experian's Corporate Health Check, corporate profitability has hit a record low, with the average return on capital employed slumping to 4.8% in the third quarter of 2003. This marked the 18th successive quarterly slide. Only sectors juiced by historically low interest rates saw an upturn in profitability. Yet now banks' profitability is also declining. HSBC is slashing jobs from its high-cost UK division and Lloyds TSB has admitted its net interest margin has dropped by 3%. A further reason to fear a rockier ride in the next half is that America's VIX gauge of market volatility is below 20, a level which since 2000 has presaged a rise in volatility and a slide on Wall Street and in London.
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