Shock waves from the US sub-prime loan debacle continue to challenge efforts by the bulls to move the market onto higher ground. But the efforts are still being made.

The FTSE 100 Index has been making several sorties above the 6,000 level, with the spasmodic help of commodity-influenced resource shares, and it is clear that further downward pressure on interest rates cannot be resisted all that much longer. But stark reminders of the entangling financial markets crisis are still able to re-stoke the flames of fear.

Credit drying up
British banks face a potential £11 billion ‘sub-prime’ hit and are abruptly turning off the credit taps, while the global impact could be nearer £500 billion. Growth projections for the UK economy are being pared again and across the Pond the dread word ‘recession’ echoes through the dealing rooms of Wall Street.

Of late, the Footsie has been hovering slightly nearer its 52-week low of 5338.7 than its high of 6754.10. Companies’ shares touching new 12-month lows (from investment star Philip Richards’ RAB Special Situations Fund, recently 106.75p and house builder Telford Homes, 158p, to broking group Numis Corporation, lately 172.5p) now frequently outnumber those hitting 12-month highs (such as Cambrian Mining at 158p, JKX Oil & Gas at 476.25p and pension consultant Mattioli Woods at 300p) by between two and four to one.

The scene is being set for an eventual sustained market uptrend, rather than the intermittent rallies of late, and, of course, an accumulation of dire economic and financial events can be the signal for just such a turn. But it would be rash to plunge in too soon, until the full ramifications of the debt crisis and credit crunch become clearer.

Don’t be too sentimental
Confidence is a tender plant. The practitioners – those who buy and sell on others’ behalf, dream up and execute deals and give advice – are not robots, immune to swings in sentiment. They are wondering whose chickens are going to come home to roost soonest and who may be culled in the next City jobs purge. In this mood, they can, consciously or not, communicate such anxiety to their clients.

One hundred per cent gloom can be the signpost for a strong advance. ‘Value’ investors may soon begin to discern bargains galore. But for now, acquisitions, special situations and defensive plays still look to be the best bets.

Even China is not immune to business cycles. Some suggest that, once the Beijing Olympics are over, the outlook there might change for a while.

After mega-losses at the likes of US banking and investment groups Merrill Lynch, Citibank, and Bear Stearns  – often accompanied by mega-compensation for the departing bosses responsible – word from UBS, that epitome of conservative Swiss banking, that its own losses on securities backed by sub-prime US mortgages leapt by £10 billion to £19 billion in the first three months of the year has forced an urgent reappraisal of the notion of a ‘safe haven’.

In Britain, signs of the resulting savage credit tightening abound, from a 40 per cent cut in office take-ups in the City of London in the six months to March to a 12-and-a-half-year low in new mortgage approvals for February and a five-year record £2.5 billion in unsecured loans for the same month, as other sources of finance have dried up.

A ‘force nine gale’
Veteran property tycoon Gerald Ronson has added his contribution to the gloom in commercial property, declaring today’s financial turmoil is ripping through the market ‘like a force nine gale’. Shares in commercial property giant British Land, at 873p, are half their level at the end of 2006, while home builder Persimmon has dropped from £15.34 last year to 678p today.

Recruitment, another bellwether of the economy, is similarly under pressure. Michael Page International, strong in banking, legal services and kindred recruitment sectors, is slowing down its UK expansion programme, though it says several other markets remain strong, as a share price fall from 595p last July to a current 275.5p is exacerbated by speculative short selling.

Nuclear power group British Energy has provided a bright glow in the market, as it prepares to embark on a new generation of nuclear power plants, following government clearance in January. Its shares, which languished at 403.5p less than a year ago, have bounced up above 700p, Diversified gas utility Centrica opened talks with continental utilities RWE of Germany and EDF of France (both of which own other UK electricity suppliers) about a possible bid for BE.

Such a deal could arouse political sensitivities about nuclear power ownership. Meanwhile, some analysts, pointing to relative valuations, suggest BE would be hard put to command such a rating without a potential bid in the offing.

Bidding hots up
Bid possibilities have restored BE almost to where it peaked in 2006. At 729.5p, ‘defensive’ candidate National Grid is more than 130p off its January high, though still more than 230p above its 2005 low.

The bid saga at beleaguered life insurer Friends Provident has entered a new phase. US private equity heavyweight JC Flowers declared it had funds in place for a £3.5 billion cash bid, which would not be highly ‘leveraged’ and has again sought talks with Friends, whose shares, having fallen from 227p early last year to 113p in February, rose above 130p.

JC Flowers bought some of its 2.7 per cent Friends stake at 165p, and 155p was the average price the US group paid. To make a bid below 165p would need Takeover Panel permission.

One beneficiary of the commodities boom has proved to be Carr’s Milling Industries, whose first-half pre-tax profits surged 45 per cent to £3.6 million. The company has been able to pass on sharply higher wheat and fertiliser prices to customers and its shares have perked up above £6.

Robert Tyerman is news editor of Growth Company Investor, the UK’s leading magazine for AIM and small-cap analysis.