Cyclical stocks continue to out perform the more defensive names as they have been doing from the start of the year, helping the FTSE 100 to push closer to the 7000 barrier. Equity markets took little notice at the start of the week of the failure so far for Greece to reach an agreement with the rest of Europe over its economy, or the fact that cease-fire in the Ukraine barely lasted the weekend.
The game of chicken between the two sides is continuing, with both sides uncertain as to that has the most to lose should Greece and Germany fail to come to an agreement over the bailout. It is probably easier to make the case that Germany has more to lose should Greece leave the euro as it’s economy has benefited more than any other country in Europe from the weak euro. Should it be forced to go back to the deutschemark the implications of dealing with a far stronger currency would more than likely throw its economy into a recession, and once again put severe pressure on its banks balance sheets.
We said at the start of the week that negotiations will go to the wire, and that is looking more likely as the hours pass. We stick to the view that whilst the will of the Greek people is to remain within the euro a solution will be found by the politicians to meet that wish, but as always with politicians nothing can be completely discounted.
On Tuesday we saw the latest inflation data from the UK, the headlines will be made as the month on month rate for January fell to 0.3%, driven by cheaper oil and food prices. What probably will gain fewer headlines is that the core rate that excludes both those items rose above expectations. We believe that Tuesday’s data will be the low point for UK inflation and from here on in we will start to see a rise as the consumer starts to benefit from an improving disposable income.
Counterintuitive though it may seem, one could argue that now would be a far better time to look to raise rates than last year when earnings were not growing in real terms as they are now, and oil prices were far higher putting a further drag on the consumer. This along with the government initiative to put pressure under energy companies to lower energy prices will give a real boost to other parts of the economy in the coming months. Now is the time for Mr. McCafferty to beat the interest rate drum, not last year.