City Watch: Charles Sylvester on why equity prices have survived the Cyprus bail-out scare

Charles Sylvester of Charles Stanley & Co

Charles Sylvester of Charles Stanley & Co

IN KEEPING with important announcements from Brussels regarding crisis situations, news that a deal had been struck between Cyprus and the 17 Eurozone finance ministers emerged at five minutes to midnight on Sunday.

Whatever the merits of the final terms, there has quite rightly been an almost universally negative reaction to the breaking of the, previously sacrosanct, concept of state guaranteed deposit assurance which I suspect will come back to haunt the authorities at a later date.

Meanwhile the financial markets reacted positively to the news, although the limited extent of weakness during the crisis period may limit the upside potential of equities for the time being.

Even without this short term stimulus, the equity bull market has continued with the Dow Jones recently hitting a record high and surpassing its 2007 peak.

In the UK, equities have also continued their strong run despite the loss of the sovereign “triple A” status and the continuing debate on the merits of the Quantitative Easing (QE) programme. Unlike the US and Japan, the UK has structurally high inflation and the Monetary Policy Committee (MPC) has indicated that it would now be willing to tolerate inflation above the required 2% for the next two years, something which a lot of us had thought it was doing anyway.

So the general perception is that equity markets look to have disconnected with reality by ignoring the ongoing economic woes.

However, they have long been considered a lead indicator and investors may therefore be hoping that the accommodative monetary policy being pursued by most central banks will create some economic traction.

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: : Charles Sylvester is a stockbroker with Charles Stanley & Company in Ipswich.