It can be difficult to see which way is up for retailers at the moment, so will increased global risk change the rules of effective retailing and distribution?
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Onwards and downwards it would seem.

After the relatively calm start to the year, this last week has seen a return to the sombre mood that we ended last year on.  Stock markets have been hammered again, unsurprisingly led lower by financial stocks, with the Dow giving up 1,000 points on the week, and the FTSE just under 300.  Meanwhile credit risk resumed its widening trend, with bank and sovereign risk dominating the move as yet another bank baiout has been required in the UK, this time the headline number being hundreds of billions of taxpayer’s money.

The economic data calendar has been relatively quiet, and if anything th UK numbers out this morning were not quite as bad as expected.  However the negative mood continues to permeate, and with news stories heralding the nationalisation of UK banks with RBS on the brink of being the guinea pig (already 70% government owned), Lloyds TSB hot on its heels (43%), now Barclays has been heavily sold in anticipation it will go the same way.  Out of the US BlackRock reported the loss of $80bn in Q4 of 2008 alone, and there seems little reason to expect anything positive to come out of the sector as a whole.

Overall we think markets will remain heavy with any pop being seen as an opportunity to sell.  Volumes remain light however as the ongoing lack risk appetite does not seem about to change, and until such time as the news flow can maintain a sustained spell of positivity there seems little reason to step in and buy.  That said, we do think that this is the time to begin to scan the market for companies that have a good financial balance and look able to trade through the storm, as Q2 or Q3 could mark the lows, and bargain hunters could appear.

With the threat of the imminent collapse of the world’s financial system no longer hanging above us there has been some return to normality.  Admittedly we are still in the first week back after holiday season and volumes are very much at the lower end, but we do seem to have the beginnings of orderly market conditions.

Whilst there is still clearly some navigating to be done by the policy makers, especially in the UK following the closure of some retailers late on in December, with rates in the developed world expected to head close to zero we are finally seeing the hoped for knock-on effect that money markets are beginning to free up.

This aggressive global monetary policy approach is also beginning to impact the corporate world with there now being a more sensible approach to valuations, as opposed to the panic we saw at the height of the de-leveraging during Q4 af last year.  The indeces tracking default risk of corporate bonds are tightening in investment grade names, whereas the crossover index tracking the higher risk end continues to widen reflecting the concern that these types of companies may well struggle to roll over their debt this year.

In equities the year has begun unremarkably with the FTSE still above 4,500 and the Dow above 9,000.  Until the first round of earnings numbers we would expect volaility to remain low, however the market still clearly remains vulnerable to any shock news.

Overall for January, after last year’s energy sapping volatility, we expect the markets to be reasonably quiet with risk appetite remaining low as participants just try and ease themselves back in without losing money.