WITH the Governor's speech due on Wednesday and the lack of any progress in the Qian-Hurd talks, the market should remain dull during the first half of the week.
But, should Chris Patten table his proposals or reveal the current position of the talks, do not expect anything other than a knee-jerk sell-off. Not many people will be really surprised if the Chinese Government responds angrily to any such moves by theGovernor.
The market has had many months to think about these developments and they come as no surprise. They certainly have not stopped the index from reaching new highs.
Having shunned the market over the past six months (its relative performance has been broadly flat), investors are now keen to get back in. The rapid return of the buyers on the post-Olympic bid sell-off is ample proof of this.
Fears that the Chinese economy would reach meltdown point are now rapidly dissipating. The mood is definitely starting to swing back in favour of the market.
There is also a longer-term factor at play. If one looks at the historical prospective price/earnings ratio, it can be seen that, after each major crash, it has taken a maximum 2.5 years (well around that period) for the prospective P/E to climb back to its long-term average.
It did not even take this long after the 1987 crash, and the index would have clawed back valuation ground lost after Tiananmen Square much sooner had it not been for the advent of the Gulf War.
