UK markets: The ECB’s support brings relief

The central bank responded to signs of distress in the interbank lending markets by extending three-year loans to European banks. Banks rushed to take up this offer, taking out loans to the record value of €489bn (£407bn).

Even as this emergency funding was made available, ratings agency Moody’s further downgraded the debt of BNP Paribas, Société Générale and Crédit Agricole. Nonetheless, eurozone government bonds from countries perceived as higher risk performed well in December (with the notable exception of Greece) as assurances made at the most recent EU summit underpinned them.

Spain sold €6.61bn of sovereign bonds on January 19, exceeding its target of €4.5bn. The country also paid an average of 2.049 per cent to place 12-month debt days earlier – down from 4.05 per cent it had been obliged to pay in mid December. Meanwhile, the extra yield that investors required to hold Italian 10-year bonds over German bunds also shrank. These developments came as a relief as they occurred in the wake of credit agency Standard & Poor’s widespread downgrades for much of the eurozone’s sovereign debt.

Uncertainties surrounding the eurozone debt issue remain, however, with one particularly high profile consideration being the ongoing negotiations regarding Greece’s bond repayments and to what extent investors will be expected to take a capital hit. The discussions are complicated by the fact that a number of interested parties have insured their exposure using credit default swaps.

Elsewhere, improved US data helped equity investors to become less risk averse as it appeared that the US economic recovery was gathering momentum. For example, the University of Michigan’s consumer confidence gauge rose for a fourth consecutive month. Data from the Chicago Institute for Supply Management was also encouraging. Meanwhile, unemployment fell slightly – from 9 per cent to 8.6 per cent – its lowest level in 32 months.

This all led investors to switch away from low beta, or areas of the stockmarket with a low sensitivity to overall market movements, and turn their attention to higher beta stocks. This has been somewhat detrimental to the equity income sector, but there were also encouraging signs of life in smaller companies, where valuations are now much lower than those of the UK equity market as a whole.

Another positive development was recently highlighted in Capita Registrars’ UK Dividend Monitor for the fourth quarter of 2011, a report which showed that dividend payments from listed UK companies rose by 19.4 per cent in 2011 compared with 2010. As we have mentioned before, some companies are still paying special dividends due to their strong balance sheets and high cash flow levels, and this was a feature in the report.