Return to Confidence

In a normal year, markets may respond to inflation, interest rate expectations, consumer sentiment or corporate earnings. But this is not a normal year. This year, liquidity has become the force that drives everything else. Worries over hidden toxic debt have left banks mistrustful of other banks. Given that much of the financial system relies on banks being willing to lend to each other, this has created a contraction in available funding and led to huge volatility in markets. The repercussions have been widespread: individuals have struggled to remortgage or have simply been unable to borrow at all. Banks are rejecting huge numbers of mortgage applications and this has put pressure on the housing market, which has seen double-digit falls on the year. Companies have experienced similar problems. Those that have had to rearrange debt have seen repayments soar. In some cases, banks have been unwilling to lend at all, meaning companies have gone bust. In turn, revenues have come under pressure as individual and corporate income has weakened. Stockmarkets are likely to remain weak until they see some sign of confidence returning to the banking system and some evidence of a willingness to lend again. Only when the Libor inter-bank lending rate begins to fall back towards base rates and money markets begin to function once again will the markets turn their attention back to to more discerning economic and stock-specific factors. For independent financial advice contact Mark or Clare at GMP Independent Financial Advisers LLP