China wobbles, US slows, EU faces recession – yet UK shares are flying
In 2022, the stock market made sense. The world was going through a rough time, due to war in Ukraine, soaring inflation and rocketing interest rates. Global share prices crashed, as you would expect. The US S&P 500 plunged almost 20%, with New York’s Nasdaq tech index tumbling by a third.
Investors expected more misery in 2023 as rising inflation and interest rates continue to drive up business borrowing costs, squeeze margins and make customers poorer.
Instead, US markets soared due to a bucket load of hype about artificial intelligence (AI). Wall Street has recovered most of last year’s losses.
By contrast, London’s FTSE 100 has been sliding since February, when it briefly hit an all-time high of just over 8,000.
Now it’s on the up.
The FTSE 100 has just enjoyed its best week in nine months, climbing more than three percent to close Friday at 7,711.38.
Although it’s dipped slightly this morning, there is a growing belief that it could enjoy a strong end to the year, busting through the 8,000 mark for the second time and breaking a new record high.
Yet others are sending out alarm signals. They see a crash coming.
Just a few short weeks ago, analysts were warning of a meltdown in China, after property giant Evergrande Group filed for bankruptcy owing $300billion (£240billion).
Chinese developer Country Garden isn’t out of the woods, either, and there is a risk of contagion in the country’s huge shadow banking sector.
In the US, veteran technical analyst Milton Berg reckons Wall Street could crash nearly 50 percent as a “severe recession” sets in.
He accused investors of being complacent while failing to ignore the risk of another banking crisis.
Berg reckons the crash will come next month. “There’s something very, very wrong with this market,” he said on his Forward Guidance podcast.
Another veteran investor, Jim Cramer, has warned that Wall Street enthusiasm for AI has driven share prices to unsustainable levels and they risk falling back to earth.
Europe is in a mess, with leading economy Germany branded “sick man of Europe” as the International Monetary Fund (IMF) reckons its economic woes are likely to continue for the foreseeable future.
Germany has been hammered by a slump in trading with China, its biggest partner, and can no longer rely on cheap gas imports from Russia.
Last November the Bank of England warned that the UK was going to face a deep recession this year, but Europe is in a worse state.
The UK has its fair share of troubles too yet that hasn’t stopped the FTSE 100. So what’s happening?
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Throughout 2023, investors have been waiting for the moment when it became clear that inflation was on the run and interest rates had peaked.
At that point, the US Federal Reserve, European Central Bank (ECB) and Bank of England could finally stop hiking interest rates, and start cutting them instead.
Lower borrowing costs will boost confidence and financial stability all round.
And we’re almost there.
Last week, the ECB increased rates to four percent but said this was probably its last hike.
The Bank of England is expected to increase rates to 5.5 percent on Thursday, but many expect it to call a halt after that.
Just a few weeks ago, consensus suggested rates could go to 6.25 percent and beyond.
The Fed is expected to hold rates at 5.5 percent this month, although we may see one more increase later this year.
And that’s why investors are excited. They think that we’re near the long-awaited turning point and shares will soar when we get there.
We could enjoy a rally between now and the end of the year, but there are no guarantees as ever. Plenty of people still believe shares will crash.
That’s always the way. Nobody can predict the future with complete accuracy. But right now, we’re on a knife edge. Stock markets could go either way.
It’s going to be a fraught few months but there are now signs of brighter times ahead.