City Watch: Darker days could lie ahead, warns Charles Sylvester

Charles Sylvester of Charles Stanley & Co

Charles Sylvester of Charles Stanley & Co

The summer holidays are over, autumn has now arrived and all we have to look forward to are months of long, dark and cooler nights; as in life, so perhaps in the financial markets as well.

Despite the pronounced increase in geopolitical uncertainty and still elevated oil price, the stock market remains remarkably insouciant. Instead investors have become agog at headlines dominated by talk of rapidly improving business and consumer confidence.

These survey results have historically commanded considerable attention, mainly due to their significance as a forward looking barometer of future economic health. However, “hope” alone doesn’t put pennies into people’s pockets.

For all the talk of a eurozone economic recovery, and there has been a lot recently, it would appear that the region’s problems have been pushed conveniently on to the back-burner ahead of the German elections on September 22. Although some unelected officials in Brussels have made a number of pronouncements about an incipient revival, the actual statistics don’t bear this out.

Germany’s factory orders for July declined 2.7%, the regional second quarter GP figures are still 3% below the levels seen five years ago and industrial production is a massive 11% below its last peak in 2008. As for the region’s unemployment figures, it’s probably best not to go there.

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One problem on the horizon would appear to be the undercapitalisation of Europe’s banks, and thus their capacity to lend. Further pressure will come as long-term interest rates rise further, as this will put downward pressure on the prices of sovereign bonds which form the backbone of most of the banks’ capital bases.

: : Charles Sylvester is an investment manager with Charles Stanley & Co in Ipswich.

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