Bang, there goes 100 points off the FTSE 100. Suddenly, the index is within 60 points of 6,000, a level last seen in late-February, which was roughly when investors recovered from their new year fretfulness and decided the gloom, perhaps, had been overdone.
But memories of January’s wobble are fresh and here’s the US Federal Reserve with a reminder of how the alarm came about in the first place. Interest rates could rise next month, according to the latest minutes. An increase is far from being a done deal – a one-third chance, according to the futures prices – but September had previously been seen as the moment.
In theory, June or September should make little difference. We’re only talking about a quarter-point rise, to follow an increase of the same size last December, so US rates will be low whatever happens. And the Fed will only move if it thinks the US economy is sufficiently strong.
Yet it would be wrong to dismiss an early US increase as a fuss about nothing. Relative calm was restored to markets in March when the dollar started to weaken. That eased the pressure on those overextended companies in emerging markets that have foolishly borrowed in dollars. China has been able to get a grip on the renminbi, which was a major source of worry in January. And oil – priced in dollars – has risen from $27 a barrel in January to $47 today, creating headroom for under-the-cosh producers like Russia. In short, a weaker dollar has made investors feel better about the world.
A US rate rise threatens to undo that work if it forces the dollar higher again. If the oil price slips, corporate bond markets – and banks – will again be fretting about defaults by overborrowed US shale producers. Any recurrence of turmoil in China would be taken particularly badly; some China-watchers argue Beijing is waiting for a good moment to devalue the renminbi properly in an attempt to restore competitiveness to an economy that continues to slow. If that were to happen, the currency wars of the past few years would look like minor skirmishes.
Meanwhile, the big-picture backdrop for the global economy looks as uninspiring as in January. Indeed, the International Monetary Fund says prospects have become slightly worse – at the start of the year it was expecting global growth of 3.4% this year but its latest forecasts say 3.2%, little better than the 3.1% of 2015.
It is possible, of course, that markets come to view a US rate rise in June as cheerful news – a sign that the world’s biggest economy is getting stronger. But that’s not the way to bet. The potential of a stronger dollar to cause havoc in the rest of the world remains an underlying obsession. Do not be surprised if markets stage a tantrum in the run-up to June’s vote: it’s the traditional way to scare the Fed into backing off.
Life’s no beach for Thomas Cook
There was no profits warning, just an admission this year’s outcome may only match last year’s. And the first-half performance, if anything, was slightly better than the City had feared. Yet Thomas Cook’s shares fell 19%.
The EgyptAir plane crash was one obvious explanation. But it also looks as if investors have underestimated the scale of the “market disruption,” as Thomas Cook puts it, for holiday companies.
In Turkey, which used to be the firm’s second biggest market, capacity has been cut by a third, with most of the reductions ordered after the Istanbul bombings in January. Even so, in the middle of May, Thomas Cook faces the daunting prospect of finding 1 million customers to take a summer holiday in Turkey. Meanwhile, Egypt and Tunisia are off-limits and there is a scramble to find hotels in Spain, Bulgaria and Greece.
In the circumstances, chief executive Peter Fankhauser’s claim of “significant progress” in the six months to March was fair. Underlying losses (inevitable in the first half in a seasonal business) were reduced by a 10th. He hopes Thomas Cook, still burdened with too much debt, can return to paying dividends this year. Good luck with that, but you can’t blame investors for feeling they’ll believe it when they see it.
Walmart holds fire over poor Asda performance
One theory holds that Asda’s sales are so weak that it’s only a matter of time before US parent Walmart orders its UK off-shoot to launch a price war to combat the discount menace of Aldi and Lidl.
Asda’s numbers are certainly poor – like-for-like sales have now fallen for seven quarters in a row. But the idea that Walmart is preparing to roll out the heavy guns doesn’t fit with the tone from the top. Asda was deemed worthy of only a single paragraph in the tour of the global empire. Walmart sounds merely bored by Asda, rather than ready to fund a price war.
