The London stock market is experiencing serious jitters. Just like all markets, it has been jolted by the U.S. debt ceiling saga.
Up until now, the world has remained complacent about the enormous, unsustainable sovereign debt levels in Europe and the U.S. The debt ceiling battle has brought the issue home that the West is flat broke.
Current levels of debt would send the average family to the bankruptcy court. Now that the numbers are front and center in people’s concerns, the scale of the problem is shaking confidence.
It’s not just Ireland and Greece in trouble; it’s the whole developed world.
London equities have a very broad geographical diversity with large emerging market exposure. This helps buffer it from developed world problems. Companies with global reach like Shell, BP, Xstrata, Standard Chartered and HSBC make up the bulk of the index. Yet, even for a globally spread index like the FTSE 100, the debt ceiling fiasco has been sobering and bearish.
If the U.S. does cut its budget deficit, it will cut off a lot of the liquidity and economic cash flow that is fuelling the global economic renaissance from Shanghai to San Paulo.
“Don’t confuse brains with a bull market” goes the old market saying. Meaning: Do not confuse the benefits of benign conditions as profits derived from your own skill.
The U.S. has been haemorrhaging money into the world through its budget and trade deficit. This money has been going straight to the emerging markets which have applied the capital to ignite their economies. The ultimate engine of emerging market boom is the U.S. and its blind monetary policy that tries to keep the good old days rolling. This is in spite of the fact its economy is out of money and luck. Without this flood of free money, the emerging market boom will shudder to a halt.
In Europe and the U.S., the debt ceiling debate crystallizes the fact the after-party of the credit crunch is over. The developed world’s credit cards are maxed out. This is set to rebound into an ‘end of the party’ situation for emerging markets and commodities. In turn, this will create a drag on the biggest stocks in London.
Compounding the bearish outlook in London, banking stocks — another of the big sectors on the FTSE 100 — have been looking sickly. Profits are well down as ‘Casino banking’ is strangled by regulation. Barclays, the British bank that didn’t go bust in the crunch, showed this trend clearly recently, as investment banking profits were slashed.
Meanwhile, HSBC — once thought of as a UK bank but now slowly sneaking off to Hong Kong away from onerous regulation — has announced huge layoffs. Some say this is a warning to the UK government to back off. These developments have not added any cheer.
The FTSE, like the Dow, had a good rally before the current Euro and U.S. debt ceiling problems reared up. They now look very fragile indeed. “Bearishness” is everywhere.
Last year saw a market crash in the summer. So far this year that has been avoided, however the market is now sat on the cliff edge ready to dive off.
Another market adage says: ‘sell in May and go away, come back on St Ledger Day’ (mid-September). This may well turn out to be great advice.
Clem Chambers is CEO of ADVFN, a European financial market website. (http://www.advfn.com). He is a frequent contributor to CNBC, BBC and business publications around the world.
