World markets follow in Wall Street's wake

WHERE America leads, Britain follows. This is not a statement about British foreign policy - although Tony Blair's critics would say it is - but a reflection of the balance of power between the City and Wall Street.

In the same way that it is US generals directing operations in Iraq, so the Americans are setting the pace in London. It is a shift that has gone largely unnoticed, little commented on and seamless as US banks flex their considerable muscle here. But it has profound repercussions for the Square Mile, which must come to terms with the fact it faces becoming an overseas branch of headquarters in New York. In nearly all respects, in the City, as in the Gulf, America is calling the shots.

One London fund manager said: 'We have been mirroring movements in the US for some time. If they have a good day, we have a good day. If they have a bad day, then we have a bad day. But if we have a bad start to the week, they just ignore us. We are inconsequential to them.'

Times have changed: hardly anyone mentions Japan any more - now it is America, America.

Daily trades among the Footsie 100 companies average between two-and-a-half million and three million. That compares with 300,000 daily trades among the constituents of the Dow Jones Industrial Average. But shares in the US have a heavier weighting than ours and, in terms of value, their transactions are light years ahead of us.

On Wall Street, price movements are often dictated by sheer weight of money. One of its leading firms, Merrill Lynch, carries the nickname the Thundering Herd - a reference to stock market bulls that carry everything in their wake. That could also apply to Wall Street as a whole, which now carries other financial markets around the world - especially London - in its wake.

The apparent rapid progress of the invasion of Iraq carried share prices in New York sharply higher in the first week. The Dow climbed 662 points, around 8%, dragging London with it as the FTSE 100 index rose almost 260 points, or 7%.

Over the years, the London market has increasingly chosen to ape the movements of its bigger rival, the New York Stock Exchange and, more recently, the hi-tech Nasdaq market. The collapse in share values in London that coincided with the Great Storm of 1987 was signalled by a fall of 100 points in the Dow, a record at the time. Those kind of movements are now seen as small fry.

Rare breed

THE boom in telecoms, media and technology stocks in America that created the dotcom bubble was matched by similar movements this side of the Atlantic. The techMARK 100 index reached a record high in March 2000, after which it went into a steep decline. That mirrors the performance of its bigger rival, the Nasdaq, in the US.

Market-makers form the backbone of our trading system in the Square Mile. They are unique, a rare breed who have a different approach to stock market investment. Risk is all part of the game and long-term positions usually last until lunch.

Spencer Crooks is the main mover and shaker at Winterflood Securities, which until a couple of years ago specialised in market-making, or wholesaling, in smaller companies. Crooks heads the recently-formed blue-chip desk.

'The first thing I do in the morning is go through all the announcements relating to the companies I cover,' he said. 'I need to know all the price-sensitive information that may affect them. I then talk to our American desk to find out what has happened overnight, particularly after the close of business on Wall Street. The same scenario is then repeated with our European desk to see if there is any information that may affect the companies I trade.'

Next Crooks goes through his emails before checking the state of play in the S&P 500 futures index, the Dow future, the Dax future in Frankfurt and the CAC in Paris.

'I will then check the oil price, the spot gold price and the state of play on the foreign exchange with emphasis on the pound against the dollar,' he said.

Recovery signs

REQUIREMENTS for fund managers, the people that handle our pensions and endowments, are similar to those applied by traders. Richard Prew, at Henderson Global Investor, said: 'The first thing I want to see is the close of play in the US. I need to know if there was any significant news after the close of trading in the States, and before the start of trading in the Far East, which will set the pace in London that day.'

He wants to know if there are signs of US economic recovery, or if it is slipping further into recession. 'You have to take into account the fact that between 40% and 50% of profits earned by our top 100 companies come from the US. That makes the dollar the key currency for British companies competing on world markets, as well as those with subsidiaries in the US,' he added.

Prew says economic data coming out of the US often lies behind the volatile price movements seen in the London market first thing in the morning, or late in the afternoon. He says Far Eastern markets have less influence on trading in London these days. They tend to be more stock specific, rather than affecting overall market sentiment.

Geoff Miller, fund manager with Exeter Asset Management, says his first port of call, once he settles down at his desk each morning, is New York. 'Wall Street is far more important to City investors these days than the Far East. The Nikkei 225 no longer has any bearing on what goes on anywhere else in the world,' he said.

He needs to know what level the Dow was trading at when the London market closed and where it finished at the close of business in New York. 'That is always the best indication of how the day is going to pan out. Nine times out of 10, Wall Street will dictate how London will open the following morning,' added Miller, who may then focus on other European markets after they have opened.

Early indicator

GILES Wilkes, head trader at spread bookie IG Index, says that after a brainstorming meeting with other traders, he switches on screens to find the euro-dollar exchange from overnight in the Far East. This is seen by traders as the earliest indicator of how London and Wall Street are likely to start the day.

'If the euro goes up against the dollar, financial markets are likely to trade lower. A weaker dollar will be followed down by equities on both sides of the Atlantic,' said Wilkes.

Next he focuses on the S&P future, which covers the top 500 industrial and commercial companies quoted on Wall Street and which is followed slavishly most times by our own FTSE 100 index. The S&P's rival Dow Jones has just 30 companies and does not give an overall market picture.

'Every percentage point fall in the S&P equates to a 24-point loss for the Footsie. When we contend with events such as 9/11, we are inclined to mark the Footsie more aggressively,' added Wilkes.

Many London traders are worried Wall Street is still overvalued. A prolonged war and continuing economic downturn could eventually lead to a big sell-off. London may yet see itself dragged sharply lower.

If markets do fall further, it will be down to the US. The next time there is a Bush or Pentagon Press conference, remember...the fate of your shares is in their hands.