Rate rise peril for shares

MuCH has changed on equity markets since October 19, 1987, yet the lessons of Black Monday still have resonance. Among the factors which made the falls on that day the worst in the stock market’s history was program trading.

Once computers starting selling on behalf of clients, there was nothing to stop shares going into free-fall.

In the aftermath, the risks of this happening again were limited by the introduction of circuit breakers designed to provide a safe space for investors trapped by panic.

Computer trading was in its infancy then, but now, using algorithms, trades are hedged in all kinds of sophisticated ways. That has not prevented some speedy and damaging declines in individual stocks.

Some 27pc was wiped off the value of Interserve on the London stock market in latest trading. BT shares suffered a stunning one-day fall of 20pc after the company revealed huge losses in its Italian operation at the beginning of the year.

Nor should we forget how America’s stock market enforcer, the Securities and Exchange Commission (SEC), went after the Hound of Hounslow Navinder Singh Sarao, after he allegedly triggered a £500m flash crash in the Dow Jones.

The idea that new, complex models, derivative contracts, shorting and a variety of other techniques will protect equity investors from shocks is wishful thinking.

It is the same kind of thinking which led former Federal Reserve chairman Alan Greenspan to suggest the spread of risk throughout the global financial system using techniques such as collateralised debt obligations (CDOs) made finance a safer place. The opposite proved true in the financial crisis of a decade ago, when CDOs detonated like cluster bombs.

Instead of powering relentlessly ahead, as they have been of late, one would be more comfortable if share markets would focus more on reality.

In the uS, Wall Street has convinced itself, Donald Trump and his Treasury Secretary, Steve Mnuchin, that the current rally still has legs because of future tax cuts and deregulation of the economy.

Fund managers incessantly talk of the market still being driven higher by fundamentals, in the shape of earnings reports.

All of this is to ignore the obvious. As we move through the last quarter of the year we can expect the tectonic plates of superlow interest rates and printing money to begin moving.

The odds on the Bank of England reversing the last 0.25 of a percentage point cut in interest rates in November are high.

This may make little difference to depositors or lenders, but the psychology of ending the near decade-long era of low interest rates could be much more important than the arithmetic.

This is especially true given that the Federal Reserve is widely expected to do the same in December, while also taking further steps to reduce the scale of the bonds it holds.

And the eurozone is bracing for an end to European Central Bank’s €60bn (£54bn) monthly purchases of securities.

It will be a dazzling triumph for central banking if a three-pronged reversal of monetary accommodation can be managed without disruption.

Mixed blessing

SPARE us the encomium to London Stock Exchange boss Xavier Rolet, who is to step down after nine years.

No one can deny the chief executive has done a good job for shareholders, helping to build the value of the exchange from its post-crisis lows and making it a leader in the business of compiling global indexes, through acquisitions.

Rolet has been more than well enough paid for his efforts at a time when most people in Britain have seen earnings stagnate.

We should not forget that, when push came to shove and Deutsche Boerse came calling with a takeover disguised as a merger of equals, he swooned into Frankfurt’s arms.

All the hard work of his predecessor, the redoubtable Clara Furse who saw off countless suitors (including Deutsche Boerse) with admirable firmness, looked like it would be undone.

It was only the intervention of the burghers of Frankfurt, Hesse politicians, insider trading charges and the European competition authorities which kept the LSE safe.

Let’s hope his successor has more backbone, and a deeper appreciation of the LSE’s place as a pillar of the City.