CHIEF MARKET STRATEGIST
THE news of the French election, with the Socialist candidate creeping ahead of incumbent president Nicholas Sarkozy, had the predictable effect of unsettling the FTSE yesterday morning. Although yesterday’s falls have only taken it back to the levels seen around a week ago, it is beginning to seem as if a combination of Eurozone, China and US worries are conspiring to take the index lower from here.
In the French election, Sarkozy looks to have a difficult task ahead in order to retain power. Markets are understandably worried about what might happen if Francois Hollande does indeed secure the Élysée Palace, given that he has pledged to re-open negotiations on the EU’s fiscal compact. This move would threaten to overturn all the good work done in the past year on the Euro crisis, and would certainly provoke a major row with Berlin.
However, one of the interesting features of the 2012 stock market rally has been its resilience, with indices going through periodic bouts of weakness only to push higher again. Our client sentiment indicator for the FTSE 100 currently shows that the optimists have the upper hand, with sentiment showing that clients are 59 per cent long. Losses for the FTSE 100 at the beginning of March saw a similar pattern, with clients switching to being buyers of the FTSE 100 and calling the bounce fairly accurately. Will this time round see similar prescience from IG clients?
Another point of interest has been the greater strength of US markets, with the Dow and S&P 500 making continued progress even when the FTSE struggles. Here, by contrast, clients are expecting greater weakness, with data showing that clients are still short on the Dow and S&P 500 by a significant margin. Recent US data has failed to match the impressive start to the year seen in the non-farm payrolls reports, which has led to a voicing of concerns that the US economy is slowing down again. However, a note of caution here, since there are still those who expect the Fed to ride to the rescue with more QE in due course.