OVERALL SUMMARY

Markets are concerned that the US is about to experience a period of rising interest rates. If so, this will adversely affect equity valuations.

As a result of these concerns about the medium-term outlook, any short-term rallies in share prices are prompting sell-offs, as participants take profits.

INFLATION

Despite the surprisingly large (0.5%) increase in retail prices between July and August, which kept the headline rate above 2% in the month, there is a strong likelihood that in the autumn the annual rate will dip below 2%. Consumer demand is recovering but not booming. Many retailers continue to focus on value-based marketing campaigns.

INTEREST RATES

Expectations of a cut in interest rates were dampened by higher than expected inflation figures for August. However, with signs that growth in the economy is accelerating Kenneth Clarke will find it increasingly difficult to lower rates without losing his credibility as a prudent Chancellor.

EXCHANGE RATES

US inflation worries and the strong possibility of lower interest rates in Germany are weighing heavily on foreign exchange markets currently.

However, these factors are primarily making markets more volatile in the short term. Further out, pressure on currencies is coming from speculation about what form European monetary will take, if indeed it goes ahead at all.

Information supplied by Lombard Street Research: 0171-337 2975