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Markets on solid ground
by Tony Butcher
Issue 6
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The more Europe changes the more the markets stay the same. London suffered a dramatic tragedy on July 7th, when bombers targeted Underground Subway stations with precision timed blasts, which caused over 50 deaths and hundreds of casualties. The days events shook the financial markets and the FTSE responded by falling over 200 points at one point in the morning.

Bond & Debt markets rallied as the possibility of future interest rate cuts became more likely. The Bank of England Monetary Committee and the European Central Bank were meeting on Thursday, so the response could have been swift. However, both the MPC and the ECB made the decision to leave monetary policy unchanged. Indeed, the FTSE100 recovered from the near 4% fall to finish the day 71 points down and by the close of business on Friday 8th the market had fully recovered. Bomb, what bomb?

London events overshadowed most of the politics of the month. Gerhard Schroeder played some interesting games after calling for a vote of confidence in his government. This was not altogether surprising given his defeat in recent German elections. For most onlookers the surprise came when he wanted to lose the vote. Elections on May 22nd had left the Chancellor without power in the Upper House, although he has a majority in the Lower House it was making economic reform almost impossible.

If he has any chance of remaining in power he felt an early election would be most beneficial, hence the vote of no confidence. His only other option would be to resign but he would not be able to stand in the general election. Delighted with his No vote the markets are waiting in anticipation to see whether he wins his general election due in autumn. The DAX, which is the German stock exchange, had a positive day on hearing the results because the uncertainty of the future had disappeared. This kind of activity is not unusual in German politics when Helmut Kohl did something similar in the 1980s.

France had a stressful time recently, suffering the blow of losing the European constitution referendum. It then came as a massive shock when London was chosen to host the 2012 Olympic Games, in preference to Paris or Madrid. It makes a nice change to see Britain rewarded for their great planning and effort which was put into the bid. I think it was the first time Britain has beaten both Spain and France in the same day since Trafalgar some 200 years ago; Nelson would be proud.

President Chirac then made his way to Scotland with the G8 and other invited leaders to meet Prime Minister Blair and discuss world poverty, trade and climate change. The whole occasion was clearly disrupted by the bombing of London, but Tony Blair was happy to announce doubling of aid to Africa and an agreement that climate change is caused by human activity and is an urgent problem.

Finally, the mighty world power that is Luxembourg put their name behind the EU constitution with a referendum on July 10th. All of the 223,000 voters made their decision and, with the majority in favour, Prime Minister Jean-Claude Juncker is saved from resignation. He still believes the constitution has some signs of life; I believe it may have to be cryogenically frozen until a cure can be found.

The markets performed very well amidst the uncertainty and disaster. They have proved that equities are stronger than ever at the moment. Trading on July 11th saw multi-year highs for major stock exchanges across the world. Even the strongest hurricane in the US for decades cannot change that.

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