Stock Market Activity - Term Paper Example

Financial Report Introduction The major events over the first full week of March (March 2nd – March 6th revolved around rising house prices, positive developments in the job market, and concerns within manufacturing sector over corporate taxes. The week witnessed a further weakening of the Sterling prompting investors to short sell stocks of all UK-centric companies. Key Stock Markets The stock markets in the United States closed on a new 18-month high by Friday. The Dow Jones Industrial average crossed the 11,000 mark for a brief period before trailing back. Much of the recovery has been attributed to fresh signs indicating a continuing reviva of the global economy although many experts remain sceptical over whether this development is sustainable in the near term. The low volume of trade has further cast doubt on the initiative among many investors who are believed to be limiting themselves to the sidelines (Arnold, 2009). The American and European Stock markets got a major boost during the week from the finance minister of Greece and the European Central Bank after both issues reassuring statements. Most European indices closed on a high note while the Dollar trailed bend the Euro. The recent developments in Greece have caused trouble amongst several European markets, raising concerns that several other European countries may also default on their debts, which could result in a crisis for the Euro (Veitilingam, 2010). The energy stocks were aided by rising prices of commodity items, which surged on the hope that demand would increase given the development in the economy. The stocks of both Chevron and ExxonMobil continued to rise. Reports of start of earnings indicate the kind of push the Dow needs to cross the 11,000 barrier provided there is enough evidence that companies will continue to make increasing profits. JPMorgan Chase and Bank of America are expected to release their reports next week, which will add to the volume of data that investors currently have including retail sales for March and housing (Veitilingam, 2010). The FTSE 100 rose by 1 percent and Germany’s DAX gained 1.3 percent compared to previous week standings. The French CAC-40 witnessed the biggest jump among European indices with an increase of 1.8%. The Japanese Nikkei gained a mere 0.3 percent during this period. Major Economic Releases The week began amid concern expressed by the EEF Manufacturers’ organization that has emphasized the need for providing short-term subsidies. The organization believes that multinationals may prefer overseas staff to British workers, signalling a danger to the revival of the manufacturing sector owing to a reduction in the availability of skilled labour. Standard & Poor has also raised the number of overdue or delinquent mortgages. Subprime loans in the United Kingdom touched delinquency rates of 28.6% in the last quarter of 2008. The agency believes that primary lenders will be affected by this trend as they will find it difficult to sell repossessed properties to private buyers . The Hundred Group says that increasing burden of the corporate tax is threatening to jeopardize employment and the rate of investments. The FTSE 100 companies have experiences an increase of 41.6% in the average total tax rates during 2008-2009. The increase in corporate tax has put the brakes on UK firms’ ability to attract the best talent to the country. The UK economy has witnessed a slight improvement in the job market both in full time as well as temporary and contractual placements. The number of permanent jobs has been the highest for February 2010 over the past 3 years, which has been attributed directly to growing employer confidence (Veitilingam, 2010). On March 3, the Treasury announced its decision to publish details of individuals and companies identified for evading taxes on its website starting April 1. The measure is likely to apply to all taxpayers who have been identified for evading taxes in excess of £25,000. Peter Sands, the Chief executive of Stanchart, has criticized several proposed changes as prescribed by the new banking reforms. The proposed changes lay emphasis on many mandatory capital requirements and raising liquidity levels (Kotler, 2009). While supporting such changes, many banks have expressed discontent at separating investment from retail banking, terming it as a distracting and expensive measure. The EEF Trade association also published its manufacturing manifesto, which calls for changes to tax legislation that it believes will benefit thousands of small and medium business enterprises. If implemented, the new tax changes will cost over £600 million to the exchequer over the next 5 years. The Halifax House Price Index registered a drop of 1.5% during the middle of the week after seven months of steadily rising house prices. The nation’s indices have commonly identified a percent fall in demand owing to bad weather while economists have begun to debate whether the price increases are really sustainable (Eakins, 2009). The Royal Institution of Chartered Surveyors is of the opinion that tax increases combines with cuts in spending will render the housing market more challenging in the coming days. The latter part of the week saw the UK small cap funds anticipate some takeover activity given the renewed interest among US and European firms to spend their surplus on acquiring small UK firms. The trend was further boosted by the weak pound allowing UK companies to be acquired for less. Most of the investments were seen in engineering firms like Spirax Sarco (SPX.L) and Rotork (ROR.L), while companies specializing in support services have been largely ignored due to the possibility of public sector cuts. The weakening pound has meant that the shares of companies registered on London-based stock exchanges like Vodafone, HSBC and BP will be on the rise for the next few weeks, prompting asset managers to revamp their UK portfolios and recommending investors to rely on long positions especially for firms engaged in foreign markets. Further, there are strong indications to avoid or short sell stock UK companies that rely predominantly on domestic operations. Charts for government yield bonds 1) US Dollar Yield Curve (Source: yahoo.com) 2) British Pound Yield Curve (Source: Bank of England) 3) Japanese Yen Yield Curve (Source: Bloomberg.com) The graphs shown above demonstrate a marked difference in the interest rates offered by 3 of the most important economies in the world. The US government offers a high interest rate for long term bonds, while it decreases in the case of the British Pound. In fact, the Pound slips beyond a 5 year maturity period unlike the dollar or the Japanese Yen, which provide an interest rate in proportion with the maturity period. Overall, the Japanese Yen has the least return for an investment in the government bond at a maximum of 2.5% for a 30-year bond (Eakins, 2009). Conclusion From an overall perspective, there has been some interesting activity in the stock markets across the world during the week with positive news coming from the most major indices. It however remains to be seen whether this ongoing recovery will stand the test of time in the days to come. The banking sector in the UK has also been the other focus area for the week due to the proposed changes in the government regulations. However, many prominent banks are not in favour of some of the proposals and voice their opposition citing additional costs to implement the changes. It remains to be seen whether the government is willing to consider any major recommendations from the key players given the contrasting public opinion and the need to overhaul the economy to prevent another financial meltdown. The global economy seems set on the path to recovery and experts are of the opinion that it is better to be watchful for a probable double dip in the near future. References 1. Arnold S (2009), The Financial Times guide to investing: the definitive companion to investment and the financial markets. New York: Prentice Hall. 2. Eakins S (2009), Finance, investments, institutions, management. Addison Wiley 3. Kotler P (2009), Principles of marketing. Financial Times. 4. Veitilingam R (2010), The Financial Times guide to using the financial pages. FT Prentice Hall. Read More