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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.
The flight to safety continues as the doves prepare to loosen further
Huge swings in the market and significant volatility continued to run investor sentiment in September. A trading range has formed on the FTSE 100 Index between 4930 and 5450, although the start of October is seeing pressure again on the downside limit. Calling direction on a day to day basis has become an incredibly difficult business as the markets continue to be driven by news flow. The flight to safety is proliferating as the Dollar rally strengthens. The Economic Cycle Research Institute (ECRI) has recently issued a warning that the US was heading into recession. The ECRI has an unerring ability to successfully call recessions, correctly identifying 6 out of the last 7 in the States. This will certainly not help the nerves of investors who are already fearful from the parlous state of the Eurozone. European politicians continue to dither their way towards finding a solution for the peripheral countries that would be least worst for the market. With the diversity of politics involved it remains to be seen if this can be achieved in any reasonable time, if at all. The much anticipated announcement of the $400bn Operation Twist was a disappointment for the stimulus craved market which was after something more substantial. However, from various central bank meeting minutes and announcements that the doves are close to getting their way again. Despite this, whether anything can now be done to prevent the western economies lurching into double dip recession is another matter.
The 7 week trading range that has formed on the FTSE 100 Index has given the sectors a chance for a little respite this month. However, there is now a total of 23 sectors (up from 20 last month) that are now in bearish long term configuration (trading below a falling 200 day moving average). On the flip side there are 5 sectors (up from 4 last month) trading above a rising 200 day ma and therefore with a positive outlook.
The defensive sectors continue to be the place for equity investors to park their money. Strong performances are coming from companies that are high yielding, but also companies with solid revenue streams which are sheltered (if that is possible) from the global economic deterioration. In other words, non-cyclical companies. Sectors at the top of the performance charts include the utilities such as Electricity and also Gas, Water & Multiutilities; the ultra defensive Tobacco and Pharmaceuticals, but also Mobile Telecoms and Food Producers. One of the reasons why the market has struggled has been the performance of the financial and resources sectors. Market volatility and contagion in the Eurozone are big issues, with the performance of the Banks, Life Insurance and Other Financials sectors (collectively over 16% of the Footsie) continuing to be very poor. Furthermore, the Mining sector (14% weighted) has also suffered badly due to declining commodity prices as Chinese growth and consumption reverts lower. With such heavyweight sectors continuing to struggle the market remains under pressure. Other sectors performing badly include the Industrial Metals and Oil Equipment, Services and Distribution.
The Eurozone probably remains the largest drain on confidence as investors look to adjust their outlook and factor in the near certainty of a Greek default. However, there is such a plethora of announcements and commentary on a daily basis that it is tough to see the wood for the trees. The fact is that according to the cripplingly high Greek bond yields and credit default swaps, the market is expecting a default. The latest Greek budget deficit numbers do little to dispel that thought. When, rather than if, is the issue and more pertinently whether a default can be orderly managed. The expansion of the European Financial Stability Facility is slowly being ratified by member states but the road is long and will be decidedly bumpy with many legislative hurdles to overcome. Although detail remains thin and speculative, the prospect of leveraging the EFSF from €780bn to over €3tr will certainly raise eyebrows at the ratings agencies who were pilloried for triple-A ratings on the leveraged investment vehicles that delivered the 2008 credit crisis.
After much anticipation, the Fed initiated Operation Twist but markets sold off with investors disappointed at the lack of QE3, even though the previous two rounds of fiscal stimulus had distinctly limited success. Central banks are turning dovish once again as economic data deteriorates. After spending the first half of 2011 in hawkish mode, the ECB could be on the brink of a rate cut, which would do nothing for the embattled Euro. While, if the meeting minutes from recent months are to be believed, peers at the Bank of England will be thinking long and hard over the influx of another £50bn of its own quantitative easing.
Gold has been a recent high profile casualty falling from a high of $1924. However despite pulling back towards $1600, both the long term charts and fundamentals remain positive, while the correction could be attributed to investors using substantial gold profits to pay for redemptions. Another reason could be the significantly appreciating US Dollar amid the flight to safety, which is rallying strongly against commodity currencies such as the Australian Dollar, the New Zealand Dollar and the Brazilian Real. However, if the flight to safety continues, this certainly does not bode well for either equity markets or commodities which tend to perform worse during times of US Dollar strength.
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.
