What it takes to move the FTSE out of its thin range

FOR the last five weeks, we’ve seen the FTSE trade in a tight range of a couple of hundred points. It would seem that the days of 100 plus point gains and losses are over. So what would it take to drive a breakout from the 5,700-5,900 range?

DIRECTION FROM ACROSS THE POND
Third quarter earnings season is just getting underway, but we’ve already seen mixed results, although with few consequence for UK markets. Alcoa disappointed on sluggish demand, and with a large number of resource stocks in London this might have been expected to result in FTSE falls. But not this time round. Equally, JP Morgan was the first US bank to report – again a heavily weighted sector in the FTSE. It presented a rather more upbeat assessment of the market, but again London has been stoic in its response.

The presidential election campaign is now moving into its final weeks, but again there has been little impact upon US equity markets, let alone further afield. Polls suggest that it’s looking like a win for the incumbent, so the only real prospect of this initiating a FTSE breakout would be if we were to see a late surge by Republican hopeful Mitt Romney.

DIRECTION FROM THE EUROZONE
A Spanish bailout has been talked about with increased frequency of late, but it has thus far failed to materialise. Nevertheless, markets have been relatively relaxed so any positive news would be unlikely to initiate a heated buying frenzy, piling back into stocks, with traders suddenly believing all is well with the world. We also had the prospect that a Spanish downgrade could skew markets, but the fact its sovereign debt still sits (just) above junk grade indicates that the ratings agencies continue to have some confidence.

However, this comes with the caveat that a bailout proceeds if necessary. Any blocking move from the Bundestag – especially given the International Monetary Fund’s support for more bailouts – and this sentiment could shift very quickly.

A CHINA CRISIS
Growth in the Chinese economy is now slowing, which can be little surprise given the rampant rates of expansion we’ve seen over recent years.

However, Beijing has repeatedly intervened with rounds of policy easing, frequently taking creative routes to keep the wheels of industry spinning freely. Each time this is announced, we tend to see some upside for London, with the big resource plays tending to find renewed support. If Beijing decides not to move, or threatens to further reign in easing, that would be a trigger for driving the FTSE out of its range – the outcome would likely be a fairly robust bout of selling.

So is FTSE set to simply stick in this range for the time being? This looks likely, assuming we don’t see any of the scenarios above playing out. A key implication is that significant price reactions would come from a heavy degree of political intervention.

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