Business

Summer shock waves - but no heat on the markets yet

Massive US tariffs on EU steel imports came into force last Friday as the UK made it clear a transatlantic trade war would be bad for both sides

LAST week proved to be a rather eventful one for Europe. All eyes have been on the situation in Italy, which has seen the new populist coalition sworn in after days of market turbulence as many feared another election later this year which could lead to a serious question over membership of the euro.

Even the idea of Italy considering leaving the euro was sufficient to cause huge consternation, after all it was a founding member of the EU and is the third largest economy in the eurozone. There was dramatic volatility in the bond market last week whereby the yield on Italian two-year bonds soared from 0.27 per cent to as high as 2.72 per cent on Tuesday and its 10-year debt yield rose from 2.4 per cent to 3.39 per cent.

It was the most volatile week for Italian bonds in more than two decades and the situation is exacerbated by the knowledge that Italy's debt stands at 130 per cent of its annual gross domestic product.

It all seems to have calmed down a little with a feeling that we were close to the brink but drew back. But it has given commentators a glimpse of the catastrophe that could result if the eurozone were to fall apart, making the Greek crisis pale into insignificance.

It's hard to avoid the realisation that there are a growing number of questions about the eurozone and more particularly the euro, which do not appear to be going away. It also highlights the disparity between member countries (last year Italian state borrowing and Germany's credit with the European central bank hit all-time highs).

Another highly significant news story last week was the introduction of tariffs by the US on imports of steel and aluminium from the EU, Canada and Mexico, three of its biggest trading partners. This appears to be the opening shot in what could escalate into a fully-blown trade war as the European Commission president has indicated there will be retaliatory measures, as have Canada and Mexico. So much for a quiet summer. It seems set to be a dramatic few months with so much going on.

It is therefore somewhat surprising that the stock markets appear to be taking all this in their stride. Both the Euronext index and the FTSE 100 index reached all-time highs only two weeks ago, and both have started this week on a positive note.

This is a good reminder that while markets do react to political uncertainty and global events, their main drivers are usually economic fundamentals, despite what commentators would have us believe.

The current historic price/earnings ratio of the FTSE 100 is standing at a relatively modest 13.44 (the long term historic average is around 15), although both small and mid-cap indices are rather higher.

This appears to initially refute the theory that we are highly overvalued, but everything does of course depend on earnings continuing to hold up well and meet forecasts. It seems that the summer could be a fascinating (and far from quiet) time for global markets.

:: Cathy Dixon is a director at the Belfast office of Cunningham Coates Stockbrokers, a trading name of Smith & Williamson Investment Management (SWIM). This article does not constitute a recommendation to buy or sell investments and the value of any shares may fall as well as rise. Investments carry risk and investors may not receive back the amount invested. The views expressed are those of the author and not necessarily of SWIM.

Enjoy reading the Irish News?

Subscribe from just £1 for the first month to get full access

Today's horoscope

Horoscope


See a different horoscope: