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Good advice 12 months early
by Tony Butcher
Issue 15
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This is my first anniversary of writing for Ovi Magazine. My first article was titled "Sell in May and go away"; it is a stock market adage which has been exercised to the fullest extent in the last thirty one days. All of the major stock markets have given back their gains since the start of the year and commodity markets have retraced from their multi-year highs earlier in the spring.

The FTSE 100 UK market fell 5% in May, the biggest monthly fall since January 2005. Oil is $100 off its highs, Silver and Copper have had large corrections as well, but oil remains above $70 a barrel. Last month I said: "Crude cruised to around $75 a barrel late in April and this could provide the dampening effect which I still feel is well overdue." This is a significant part of the story.

The large increase in commodity prices over the last 12 months has seen inflationary pressure starting to build in all the major economies of the world. The United States have pursued a constant tightening of monetary policy for 16 meetings in a row and rates currently stand at 5%. This policy looks set to continue for another month while the US Federal Reserve get a grip on inflationary pressures in America. The recent Fed minutes of their May 10th meeting focused on the uncertainty of how much more tightening was required after the most recent hike.

It is a similar story in Europe as the European Central Bank get set to increase interest rates on the 8th June. There are rumours this move may be a larger 50 basis point hike, which would be more aggressive than the recent 25 b.p. moves. I feel the half point hike would be more likely if the Euro was not showing the strength it is against the dollar.

Recent figures from Europe showed M3 money supply (a guide to consumer lending) stronger than expected, inflation estimates increased to 2.5% and sentiment data has also been strong. There is not the certainty that we had earlier in the year, especially with Jean Claude Trichet talking about an eyebrow raising "strong vigilance"; well worth keeping an eye on the situation.

Some equity friendly news which has been developing over the last few days is the United States warming to talk with Iran regarding their Nuclear Programme. This looked set to become very heated a few months ago, but recent comments from Foreign Secretary Rice have opened the door to negotiations. The world waits to see if Iran will take the olive branch being wafted in their direction.

Just enough time for a quick word on the United Kingdom economy, this has continued to plod along. Interest rates look set to stay unchanged for the time being, although the next move will likely be an increase. There was news out from the treasury which said the government have over paid some tax benefits by as much as £4 billion over the last two years. Imagine the scandal if this had been a FTSE 100 company!

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