Only registred members can create thier own customized alerts.
Trader Talk is produced by a team of active traders, analysts and various derivatives professionals from multiple organisations. Trader Talk provides comment on equities, commodities, and other financial instruments based on both technical and fundamental analysis.
Will the markets be able to fight off a post QE2 slide?
At one stage last month it was as though the saying should have been changed to “Sell in June and go away...” as investors faced serious market headwinds with global indices taking a decisive turn for the worse. As soon as the early June employment data significantly disappointed, investors began to sell, worried by the lack of pace in the economic recovery. The FTSE 100 broke below both the rising 200 day moving average and the primary uptrend which had been in place since the March 2009 lows and posed questions about the validity of the long term positive outlook and a continuation of the bull market. However the support band between 5500 and 5600 held and a quick recovery back above 5900 seems to have at least kept the doom mongers at bay for a little while longer. There are some big economic factors that continue to drive the daily appetite for risk. Fiscal stimulus in the States is one of the big question marks as we move into the second half. The end of QE2 and the prospect (or lack thereof) of a third round of fiscal stimulus are significant variables for investors to ponder. Additionally the plight of Greece is another issue that has seemed to alter investor sentiment almost on a daily basis. The bulls will hope that investors have not “gone away” and that the recent bout of hedge fund redemptions have been able to flush out the sellers. As H1 2011 ends investors will no doubt be glad to see the back of an incredibly tough period for the UK equity market and hope that the headwinds ease sufficiently to enable a more prosperous second half of the year.
After the early months of 2011 where the long term technical position across the sectors had remained positive there was a definite sea change in June. From still having 35 (of 38) sectors trading above a rising 200 day moving average a month earlier, there are now only 29 sectors with this characteristic and five of those are only just trading above the 200 day moving average.
A number of sectors have recently fallen below the rising 200 day moving average, with sharp declines in aerospace & defense, construction, financial services, and travel & leisure. The key would be whether these declines are viewed as buying opportunities. The yielding element to aerospace may provide support, however travel & leisure is highly cyclical and may struggle. Banks remain a real drag on the market, weighted at around 15% of the FTSE 100, the sector has fallen almost 10% in H1 2011 and has been a drastic relative underperformer. The mining sector has also fallen back dramatically as the market has opted for risk-off in recent months, however if risk appetite makes a welcome return in the second half expect the miners to bounce significantly. The strongest sectors of late remain the more defensive, high yielders. The pharmaceuticals have had a strong half, as has real estate. Electricity, tobacco and non-life insurance have also been strong.
There have been two major stories that have dominated the financial markets throughout June. Greece has hit the headlines on a near daily basis, while the approach of the Federal Reserve to its fiscal stimulus plans have also kept investors interested. Both factors contributed to make June a particularly volatile month for equities and currencies alike.
The soap opera of the Greek bailout has dominated column inches but has ended the month on a positive tack. Amid huge public protest the Greek Parliament has voted through an austerity package that is another step down the road to now securing the next tranche of IMF bailout money. This should allow Greece to remain “solvent” (tongue in cheek) for 2011. However kicking the can further and further down the road is all very good but how far can/will the political elite in the Eurozone persist in holding up Greece from default remains to be seen. Still, at least in the short term, the risk-off environment that had threatened to drag stocks below 5600 (and a 2011 low) has been averted. For now, risk appetite is back in play and this is helping stocks rally, commodities rally and the Euro push higher again.
The prospect of an end to QE2 has been looming for a while. The last time the Fed turned off the taps the FTSE 100 fell over 1000 points in a matter of weeks. Ben Bernanke has stated that the threat of deflation was a key factor in the decision making for QE2. With inflation now increasing, the need for stimulus is reduced. Taken at his word (he is unlikely to talk about QE3 before the event for fear of reducing the impact), this means that an end to QE2 may happen without the prospect of QE3. Quantitative Easing has been the major tool for the risk trade since March 2009 and the market felt clear pressure throughout May and June as QE2 was ending. What happens now for the second half of 2011 is tough to say. Bank of America has already advised cutting back equities in its global portfolio (from 54% to 52%) as a direct result of the withdrawal of stimulus. If this becomes a trend then equity markets could feel the pressure.
The big questions as we suck on our half time oranges are whether Greece can stay on the straight and narrow and whether “Helicopter Ben” (Bernanke) becomes tempted to stimulate even further. Whatever happens, expect more of the same in the second half of 2011. Expect a rocky road.
This report was written by Richard Perry – Chief Market Strategist at Central Markets www.centralmarkets.co.uk The writer does not hold a position in the company featured, but client accounts may. The material in this report has come from the company’s corporate website and Alpha Terminal.
