The FTSE 100 closed down Friday. It's the same story, mining stocks are weak. Very strange mining stocks are unable to rally, normally when they are oversold they bounce back. But in the current environment they are in freefall which means the FTSE is unlikely to rise by a significant amount.
The other negative factor is the drop in Chinese stocks. I have not given my opinion on Chinese stocks in recent months because the wave count is not clear, but during the summer the bubble burst and I have always said that Chinese stocks are in a bear market. Bear markets don't die easily, the rally from the August low may have reassured investors but not me, I remain bearish and Friday's 5.5% drop is probably the start of the next leg down. The Shanghai composite index is down again today, if the decline continue the FTSE will struggle even more, the index is unlikely to return above the previous high at 6488.
This is why the rally may not last very long. We know that December is bullish for stocks but the negative factors are creeping up, which means the FTSE will struggle to rally after the first week of December. The index has the potential to rally below 6500 in the short term, thereafter I expect the bear market to resume.
I ask the question because I know there are some people out there waiting to join the Better Trader service. You see, if you tried the Better Trader service for a short period of time like a week or a month, you don't know what you are missing. In a month I can't guarantee that we will catch a big move.
I always say the money is made in the big moves. The thing is, catching a big move doesn't happen every week or every month. The last time I predicted a significant rally was on 13th November, see:
European markets declined for the second day in succession yesterday, buffeted by the announcement of a global travel alert by the US state department, followed by the shooting down of a Russian fighter jet by a Turkish military F-16.
While this escalation of geopolitical tensions has served to help put a short term floor under oil prices it has put an already fragile market even more on edge as investors gear up for the prospect of a Federal Reserve rate rise next month.
With US markets having to contend with a shortened week due to the Thanksgiving holiday, the rebound in energy prices did prevent US stocks following their European counterparts lower, as we await a data deluge of US data later this afternoon, including the latest durable goods numbers for October as well as the latest inflation data.
Before that we have the small matter of the Autumn Statement and comprehensive spending review from UK Chancellor George Osborne.
While today’s Autumn Statement is likely to be more important for political reasons than economic ones, particularly the politically difficult changes to tax credits, this month’s horrific events in Paris have shifted the focus somewhat towards a rethinking of the planned reductions in the Defence and Home Office budgets, which could well be significant for companies who have procurement contracts with the UK government, which has been reflected in the recent rebounds in defence related stocks like BAE Systems and Cobham. We could well see some more detail in the context of digital investment, in terms of cyber-crime.
Another focus for markets will probably be around whether the government chooses to make any changes to the controversial additional tax surcharge on bank profits of 8% on top of the usual corporation tax rate, which is due to apply from January. The main criticism is that it is likely to discourage competition in the sector given the low level the tax kicks in which is at £25m, disproportionally affecting smaller banks like Metro Bank, who have a smaller presence and whose margins are tighter.
The BTI was unchanged yesterday, and indication that sentiment is about to turn bullish. The indicator is no longer declining, that is what you would expect at this time of the year. We saw a strong rally on Wall Street as Fed officials continued to flag December as the time for an interest rate hike. In this situation I would expect a negative reaction from the stock market, instead the stock market rallied. This shows that sentiment is changing from bearish to bullish. The market wants to go up, whether rates go up or not, it's a win-win situation.
I must say the latest economic data is disappointing, yet the Fed is ready to hike. We saw a large drop in October US housing starts yesterday, -11%, analysts had expected -4%. People view a rate hike as a signal that the Fed's confidence in the economy is growing, but they could be wrong. I fear that a rate hike in December will have a negative effect on the economy.
In a sign that financial markets remain skittish, the rally in US equity markets that followed on from European markets strong lead this week was stopped dead in its tracks last night, on reports of a multiple bomb threat in Hannover, with the result that the Germany v Holland game was cancelled.
These reports saw US markets pull back sharply off their intraday highs as the fear factor reasserted itself, and look like translating into a slighter weaker European open this morning, despite the alert being a false alarm.
Despite rising concerns that last week’s attacks are likely to have a significant dampening effect on economic activity in Europe, this week’s rebound has been driven by the belief that further policy action by the European Central Bank is now more likely, particularly in light of comments by its Chief economist Peter Praet, which in turn has driven the euro to its lowest levels in seven months.
At its October meeting the Federal Reserve wrong footed the markets completely by publishing a surprisingly hawkish statement in the face of a much weaker US economic outlook than was the case at the September meeting.
In September the FOMC pointed to the recent global economic and financial developments restraining economic activity which could put downward pressure on inflation in the near term. This line was dropped from the October statement, while there was also a subtle change to the narrative relating to the target range where it was discussed whether it would be appropriate to raise it, as opposed to maintaining it.
This subtle change certainly suggests a very real debate about the merits of a move in the Fed Funds target range, and today’s minutes will certainly give us an insight into how vigorous a debate was had and whether the misgivings articulated by permanent members Lael Brainard and Daniel Tarullo in comments prior to the meeting in October meeting were still held by them.
Since those minutes we’ve had the best payrolls report this year, the US dollar has also risen another 2.5% to be over 13% higher year on year, while concerns still remain about the health of the US manufacturing sector which appears to be undergoing its worst period since the 2008 recession, with input prices remaining worryingly weak.