Buckle up for more of the FTSE rollercoaster
MAYBE you don’t have to be schizophrenic, but it helps. In the last month the FTSE 100 has oscillated madly from optimism, to despair, back to optimism – before finishing Friday once again enveloped in gloom.
In that time we’ve had nine consecutive days of gains that took us to 5,300, then a period of intense pessimism, triggering a plunge to a year low of 4,805. At that point 10-year treasury yields were firmly below three per cent and fear was mounting. Soon enough, the bulls were screaming that we were oversold on stocks and overbought on bonds – cue a nine per cent rally and a good start to the earnings season, taking us back to near where we started. Then weak US consumer sentiment on Friday meant the fear returned.
Prior to the recent volatility, most economists and strategists expected a self-sustaining economic recovery in the US that might average at least three per cent GDP growth. Now, many of that same group are reducing growth forecasts and cutting their bullish stock market target.
With Europe grappling with its debt crisis and bank stress tests at the end of the week, US growth will be key for market sentiment. Mike Lenhoff from Brewin Dolphin notes that “the loss of momentum from the underlying economic news flow is no sentiment booster for the risk trades and nor are Fed minutes”.
The Federal Reserve, remember, downgraded the GDP outlook and said consideration of more policy stimulus – aka QE – might be needed. All of which has caused the dollar to weaken and the euro to rally back over 1.30 – not exactly what European exporters were hoping for either.
On the flip side, a good earnings season may help equities overcome fears of reduced economic growth. Roger Nightingale has been telling me for nearly a year that companies will deliver better than expected returns by curtailing labour costs. He thinks looking for top line sales growth is misguided but that margins will remain intact and profits will be maintained.
As long as we get some growth in the West and emerging markets remain strong, the bulls might eventually turn out to right. But for now the magnitude of the economic weakness may be debatable – but that the economy is in a sorry state cannot be.
In that climate the high-frequency-traders and momentum boys will remain in charge. Buckle your seatbelts, take the valium; it could be a long bumpy summer.
Ross Westgate, Anchor, CNBC.