The Daily Reckoning UK

An Unexpected Rally For The FTSE 100 And 250…

Darren Sinden

by

Posted 14th July 2017

Well, that wasn’t expected…

On a day that saw record employment in the UK and wage growth that continues to lag behind inflation (a combination that might be thought of as negative for UK investors and assets), the FTSE 100 rallied sharply.

It was up 110 points at one stage, before closing up a creditable +87 points.

The good feeling spilled over into the midcaps, with the FTSE 250 finishing the day 57 points to the good as well.

The FTSE 100 rally took the index away from the key support level circa 7300.

Now, we recently discussed this level and it is still relevant, as there’s no guarantee it won’t retrace or give back yesterday’s gains in due course.

We will get a feel for how likely that is by watching how the index trades at and around 7400, which is both a round number and the point where we find the 20 and 50 day EMA lines on the FTSE 100 chart.

The index doesn’t look overbought, so there’s no definitive reason for it to fall back. But the markets are being quite fickle at the moment, so there’s no guarantee that yesterday’s gains are the start of a new uptrend either.

At a sector level export stocks led the way, with the Steel and Other Metals sector being the best performer, finishing up +3.9%.

But as we can see from the chart below, there were plenty of other gainers as well…


Click image to enlarge.

What’s more, many of these sectors contain heavyweights, or stocks that move the FTSE 100 and 250 indices by virtue of their size (market cap) alone.

At a stock level upmarket clothing retailer, Burberry, and Chilean miner, Antofagasta, are two of the obvious standouts and both are exporters, who earn much of their money outside of the UK.

Now, if it wasn’t the UK employment data that took the market higher, what was it…?

Well I think there were two drivers behind this rise:

Firstly, some unexpectedly strong industrial production numbers were released from the Eurozone. They suggest that the world’s second largest economy is starting to perform strongly once more.

The Eurozone is an important target market for UK exporters and increasing industrial demand is good news for steel producers and miners.

The second driver came from the USA, in the shape of a weak US dollar, something that’s usually seen as being positive for commodity prices.

The weak dollar was created in part by comments from the Chair of the US central bank, Janet Yellen, in her testimony to congress.

These were interpreted as meaning US interest rates are not going up again just yet.

Cheap money has been an “elixir of youth” for equities around the globe and if it’s going be on tap for a while longer, that’s positive for stock indices.

An excess of expectations could cause trouble across the pond

There was an interest rate rise in North America yesterday, but it came from Canada, a country that rarely takes centre stage in the world’s financial markets, but one that is now firmly in the spotlight.

Though the focus will switch back towards the USA next week, as earnings season gets underway once more.

The Mining and Metals group Alcoa would usually kick of proceedings on Wednesday evening, however this year the Banks start the ball rolling on Friday. The results will come thick and fact after that.

Earnings for the S&P 500 stocks are expected to grow by a respectable +6.50%, according to research from Factset. And there are some early indications that they could do even better.

But as we have previously discussed, when expectations are riding high it’s easy for results to disappoint.

This is particularly true in the case of US, where the market pays so much attention to forward guidance (how the company reporting thinks it will fare in the next quarter, rather than how it’s performed in the prior one).

The chart below plots the change in S&P 500 “forward looking” earnings per share (EPS) against the change in the indices’ price.


Click image to enlarge.

The light blue line is the price, the darker blue line the EPS number. The gap between these two lines could be said to represent the excess of expectations among US equity investors.

This expectation gap is at the widest it’s been for the last 10 years and I can’t believe this a good thing, unless US Q2 earnings are going to knock the ball right out of the park every time.

Of course, the markets may decide that that bigger picture takes precedence and that “lower for longer” US interest rates can more than offset any individual, or even collective, disappointments from earnings seasons.

The big US banks will act as a barometer for overall sentiment I suspect, as they would typically benefit from rising interest rates in terms of their profit margins.

But the banks have fewer problematic loans or other issues to contend with when money is cheap and the economy is effectively being subsidised.

How investors react to the earnings of Bank of America, Citigroup and Goldman Sachs will help set the tone for the balance of 2017, as far as the outlook for equities is concerned.

And it may well establish which of the competing trends within the market the real money is going to follow into the year end…





From time to time we may tell you about regulated products issued by Agora Financial UK Ltd. With these products your capital is at risk. You can lose some or all of your investment, so never risk more than you can afford to lose. Seek independent advice if you are unsure of the suitability of any investment.

Make lightning-fast returns from 'Penny Cryptos'