MARKETS & DATA – Optimistic forecasts back in vogue.

UK stockmarket[QQ] The performance of the UK market this year has followed the swings in sentiment about the global economy. Its defensive tag led to underperformance against global averages as pessimism lessened in January, but some signs of relative strength once the cut in US interest rates came. A similar pattern was evident within the market, with cyclical sectors and then defensive areas making the running.

Overseas equities The Fed’s latest interest rate cuts had been well discounted by a rally in equity markets and the announcement marked a short-term peak in both broad US and global indices. Technology stocks have subsequently come under pressure as investors’ attention returns to current business conditions. Cisco, until recently the biggest cat in the technology jungle, fell over 10% in a day after its latest quarterly earnings undershot forecasts.

Interest rates The latest cuts in US and UK interest rates have had little effect on investors’ expectations for the rest of the year. Perhaps demonstrating confidence that the current US slowdown will be short-lived, futures markets are discounting only another 0.5% reduction in US rates. If anything, even less is expected from the UK and eurozone, where the economic outlook is perceived to be relatively robust.

Exchange rates Belief in the ability of the Fed to turn around the US economy quickly may also be finding expression in the currency markets. The recovery in the euro and sterling, which had seen them rise by about 10% and 7% against the US dollar since late November, petered out in the first half of January, since when the dollar has regained the upper hand.

Related reading