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Brighter tomorrow postponed yet again

UK stockmarket[QQ] The travails of Marconi may have hogged the headlines, but its difficulties merely gained the highest profile of a large number of profit warnings issued by UK companies over the summer. Manufacturing and technology sectors suffered more than their fair share and the top of the sector performance table continues to be dominated by the defensive sectors that finished the first half on the strongest note.

Overseas equities

Current pressures on profitability have continued to bear down on markets in recent months, with US corporations suffering the most immediate problems. Second-quarter operating profits were about 20% lower than in the same period last year. Further declines are expected in the next two quarters and, although the rate of decline is expected to decrease, analysts continue to nudge down their forecasts.

Interest rates

After a month free from interest rate cuts, estimates of the mileage left in the current rate-cutting cycle have increased. August has already brought a reduction in the UK and is almost universally expected to do so in the US. Recent comments from the ECB have encouraged hopes that it too may cut rates this month. Even if all these cuts were to happen, forecasts derived from futures markets are for rates to be lower still by the end of the year.

Exchange rates

A rapid return of the US economy to late 1990s levels of growth is seen as increasingly unlikely, and the second half of the year has seen a significant reversal of the dollar’s upward progress. The euro rebounded strongly from under $0.84 in early July, recently breaking through $0.90 for the first time in five months. Even the yen (seemingly every commentator’s least favourite currency) bounced almost 5% in the first half of August.

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