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Share Watch
Your weekly stockmarket update from Brewin Dolphin, Hamilton House, 6 Nantillo St, Poundbury. 0845 213 1280. www.brewindolphin.co.uk
Motorists and equity markets are looking a little happier this week as the oil price has dropped by around 10 per cent.
The link between oil and motorists is an obvious one and prices at the petrol pumps have also fallen thanks to a price war between the supermarket chains - long may this continue!
As for oil and equity markets, there are in fact many links and some are less obvious than others.
Firstly, just as individuals benefit from a falling oil price through lower fuel and heating costs, the same applies to businesses. All other things being equal, lower costs should lead to higher profits for businesses, prompting a rise in share prices for those companies that are quoted PLCs.
Secondly, changes in the oil price have an impact on inflation. Thus the recent dip in the oil price (assuming it does not spike higher again) should help to guide the inflation rate lower. With the inflation rate currently running at nearly twice the Government's target, this is welcome news all round. A lower inflation rate will give the Bank of England more flexibility to lower interest rates to boost the economy which has slowed materially since the credit crisis struck last summer. Lower interest rates reduce the cost of borrowing for individuals and businesses alike. Once again, lower costs should feed through to higher profits and, for quoted companies, higher share prices.
It could also be argued lower interest rates will help to restore liquidity in the capital markets which have virtually dried up over recent months as lenders have been reluctant to part with their cash. A healthy funding supply is essential for a growing economy.
Finally, lower interest rates would also make shares an attractive proposition compared to other forms of investment such as property, government stocks or even cash deposits.
This list is not all-inclusive but hopefully I have cleared some of the mist surrounding how the financial markets relate to the real world. Having said all of that, the financial markets are prone to periods where sentiment can push markets one way or the other. A decade ago we saw how euphoria sent equity markets to unsustainably high levels and we are now in the midst of a downward cycle driven by fear.
Meanwhile, in the real world, life continues and we have a stream of company announcements to digest during the second half of the week.
The bank reporting season also gets under way next week with half-year results due from Lloyds TSB and HBOS. No bad news would definitely be good news on this front.
David Evans
11:41am Wednesday 23rd July 2008
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