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Comment: Real effects of the bull run and recent shake-out are yet to be felt in the UK market

With global markets in turmoil issues which had until recently been swept under carpet are now having to be confronted, says Darren Sinden of LITE Trading.

For too long, we (in the UK) have been happy to ignore rising energy & commodity  prices and the knock on effect that these have had on economic stability, preferring to focus instead on  rising equity prices  and in many cases to join in the speculation in commodities, in doing so perpetuating  the cycle.

The FTSE 100 Index was for the last 18 months a beneficiary of the rising price of Oil and Commodities such as Gold & Copper - indeed the Bull Run in the prices of these consumables has lead miners to new highs & made the FTSE highly volatile as the weighting of the mineral resource stocks is now 30%.

This will increase further next week when Vedanta & Lonmin are promoted into the top one hundred, volatility is unlikely to be lessened as a result  and turning many tracker funds into proxies for the mining sector .Whilst falling commodity prices mean index volatility they do not have an immediate effect on the real economy and consumers.

However rising energy prices feed through much quicker to the economy and impact consumers directly.

The impact of even relatively small energy price rises on consumer spending patterns should not be underestimated.  A  recent survey commissioned  by LITE Trading  and conducted  by  market researchers Ipsos MORI  provides  insight into the dramatic effects  that household expenditure will be subject to  and from this we can extrapolate this  data to make predictions about which sectors and companies .

Our Survey found:

  • That spending patterns in some four million households will be affected by a rise in energy bills of only £13 a month. 
  • With almost seven million households (over 25% of UK total ) having an annual income of less than £11500 there are a significant number of consumers whose marginal disposable income will be dramatically affected by even small  energy price rises.
  • This same rise in energy bills (£13 per month)   would lead three million households to reduce the amount they spend on their mobile telephone.
  • Whilst a similar number would reduce their spending on alcohol and tobacco commodities which historically are seen as having and inelastic or constant demand amongst consumers.
  • Energy price rises similar to those imposed early this year by major suppliers will directly affect the spending patterns of 15 million households.
  • Nearly 20% of households would reduce the amount they spend on eating out if energy prices rise by less than £20 per month. This figure rise to 30% of households if domestic energy bills rise in excess of £20 pm.
  • 21% of households would reduce the amount spent on Alcohol & Tobacco in the event of a rise in monthly energy bills greater than £20.
  • With almost seven million households ( over 25% of UK total ) having an annual income of less than £11500 there are a significant number of consumers whose marginal disposable income will be dramatically affected by even small energy price rises.

In February & March of this year we saw price rises imposed by  Gas & Electricity suppliers which will mean that the average  domestic energy bill will  rise by an extra  £209 per annum or  £17.41 per month give the quarterly nature of  utility  bills  many household  will not  yet have felt or indeed realised the impact of these rises .Looking at our survey data we can see that this level of  monthly energy price rises  could  affect the spending of  70% of GB  households  and this  will undoubtedly be felt in the Economy as a whole . We believe that the changes in spending behaviour will begin to manifest themselves in the late summer & into the last quarter of this year. The world cup party will be then over and the hangover could just be beginning.

Darren Sinden, LITE Trading

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