August saw the price of oil continue to fall from its early July high of $147.27 a barrel. With eyes firmly fixed on Hurricane Gustav the oil price ended the month at $115.65*. However, dramatic weather patterns aside, there has been a clear break in the upward momentum of the oil price witnessed throughout the year and, with the speculators seemingly flushed out of the market for the time being, the trend of falling prices looks set to continue over the coming months.The falling oil price has gone some way to relieving domestic inflationary pressures and it is hoped that the Bank of England may be able to turn their attention towards stimulating growth in the economy whilst ensuring the inflationary genie gets back in its bottle. Unlike the US or Japan, the UK does have room to manoeuvre in stimulating growth through interest rate cuts, although the calls for such cuts have been resisted so far.There is no doubt about the fact that investors want to see a rate cut and until that happens a prolonged period of fearful markets may continue. However, inflation is still a threat and the Bank of England is unlikely to cut rates until that threat has abated. Wage inflation is a real concern but this has been contained so far and it is hoped the Government will hold firm - a stance made easier as the unemployment numbers creep up.The overriding fear is of recession but regardless of whether we have hit the official definition of two quarters of negative growth or not the average UK resident has a very real sense that we are in recession already. The FTSE 100 Index, led by financials, enjoyed a rally on the back of the falling oil price, ending the month up at 5,636.6. These are volatile times, though and we are clearly in a transition phase.Markets are extremely wary at the moment and any news, good or bad, is likely to tip the fine balance. However, the tone of the market commentators is changing. The consensus is that things are not as bad as they are currently portrayed and there is plenty of scope for optimism. The long bond markets are factoring in a fall in inflation and equities continue to offer extremely good value for investors, relative to other asset classes and on an historic basis.
