FTSE 100 Stock Market Index Resilience

By: Seven_Days_Ahead

Like most other major equity markets the FTSE has recently endured yet another round of risk aversion that has seen the market correct lower.

FUNDAMENTALS:
Like most other major equity markets the FTSE has recently endured yet another round of risk aversion that has seen the market correct lower.

Additionally the FTSE has domestic issues which also weigh on the market, which are:

CPI inflation running well above the official MPC target of 2.0%,
Uncertainty about the strength of UK’s economic recovery due to the governments fiscal retrenchment, and
Uncertainty about the outlook for official interest rates caused by both of the above.

There is no doubt that the Governments spending cuts pose a serious risk to UK economic growth over the next few years. The timing of the cuts is unfortunate but unavoidable. The economic recovery was just beginning to show signs of strengthening, but because of the size of the budget deficit and the build up of debt, the government didn’t have the luxury of time.

The Euro zone was already experiencing a Sovereign debt crisis, which one year on continues, despite the EU/EZ/IMF putting a sizeable rescue fund in place, but markets don’t think it adequately addresses the problem.

Because of what was going on in the Euro zone the UK Government felt compelled to act and hoped that exceptionally low interest rates would cushion the blow of the spending cuts.

Therein lies the Bank of England’s dilemma. On the one hand policy makers do not want to see inflationary expectations rise and become entrenched, but because of

The economy’s current weakness, they are acutely aware that to push up interest rates now would push the economy into recession. In deciding to wait and see, policy makers hold the view that any rate rise now would not affect current inflation, which they judge is caused by one off events:

The self imposed VAT hike to 20%,
The sharp rise in Oil prices, and
The sharp rise in commodity prices.

Policy makers judge these are one offs and will wash through the statistics so rate hikes now would not take effect until about 18 months later, just when inflation should be moderating any way. The result then could be a substantial target undershoot.

All this sounds very well but what does it mean for the FTSE? Equity markets especially, hate uncertainty and at the first whiff of it traders succumb to risk aversion and the market retraces.

However risk aversion isn’t a natural Human state, we like taking risks and traders usually quickly begin to see beyond their fears and seek opportunity.

We believe that is now happening in the FTSE. The wave of risk aversion caused by the uncertainties outlined above are losing their impact and traders see very low interest rate underpinning a recovery that is slowing but is still proceeding.

Add in the fact that the FTSE isn’t a purely domestic market since many foreign firms choose to list there, especially commodity and natural resource oriented businesses, so the FTSE has a degree of shelter from purely domestic events.

Mark Sturdy
John Lewis

Seven Days Ahead
Be sure to sign up for and receive these articles automatically at Market Updates

Mark Sturdy, John Lewis & Philip Allwright, write exclusively for Seven Days Ahead a regulated financial advisor selling professional-level techni44cal and macro analysis and high-performing trade recommendations with detailed risk control for banks, hedge funds, and expert private investors around the world. Check out our subscriptions.

© 2011 Copyright Seven Days Ahead - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.