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Watching 2006 closely
by Tony Butcher
Issue 11
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Happy New Year everyone! There's plenty to look forward to in the coming twelve months. Worldwide stock markets have had a very strong start to the year, but the real headlines are going to the commodities.

Large banks and funds who squared their books for the end of 2005 have been buying the world's resources on the financial exchanges. Oil (4%), Gold (5%) and Copper (2.8%) have all had large price rises from the start of the year. Secondary commodity markets have also been benefiting, with coffee and sugar performing particularly well so far. But when everyone is calling the markets higher, it makes a perfect opportunity to sell some of those recent highs.

Stock markets, for example, have gone through large psychological levels with the FTSE 100 (UK) above 5700 and the Dow Jones Industrial Average above 11000. I would suggest a correction could happen before lovers celebrate St. Valentines Day on the 14th February.

The coming months will be focusing on different events either side of the Atlantic. Firstly in Europe, the European Central Bank (ECB) is widely expected to raise rates again in March 2006 by one quarter of one percent to 2.5% and rising to 3% before the end of 2006. This will be in their continuing attempt to provide price stability to the citizens of Europe, by controlling inflation which is still at risk from second round effects from wage price negotiations in the member countries. Although I feel the more of a priority the ECB makes of this issue, the stronger the wage demands will be from the major unions in France and Germany.

Germany is starting to see the beginning of an economic recovery and the massive influx of foreign visitors and their money for the Football World Cup Finals in June will give it a mighty boost. If anyone can find somewhere I can back England to win at more than 10-1 please let me know.

In the United Kingdom, it is a matter of 'wait and see'. The recent small cut in interest rates will not be the start of a series of moves, and the markets are keeping a close eye on all the data coming out over the next few months. It looked like a strong trading Christmas for most retailers and they will be hoping to continue that trend into the spring.

In the United States, Ben Bernanke is only weeks away from taking over from Alan Greenspan. It is clear he will be in charge of bringing the current cycle of rate rises to an end, but the unanswerable question is at what level the Federal Reserve will stop. It will be somewhere between 4.5-5.5% and I would think by the end of 2006 interest rates will be at the upper end of that range.

The major macro-economic story for the start of the year is Iran's desire to begin nuclear power generation. Allowing one of the world most unstable and uncooperative countries the ability to produce the most devastating weapon of modern times is not on anybody's agenda. The United Nations Security Council involvement is probably only weeks away and the world's eyes are watching closely.

Luckily for American troops in Iraq, it's not too far to walk to Iran to begin military operations there. It makes me think the whole Iraq war was just to give the United States the largest base camp it required for another invasion.
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