14th March - FTSE's absolute strength (and relative weakness) - Market updates

14th March - FTSE's absolute strength (and relative weakness)

18 March 2013

TECHNICALS:

WEEKLY CHART

The FTSE is powering up towards the ALL-Time-Highs from 1999 and 2007.

So a critical band pivotal from Prior Highs lies above at 6796-6995.

DAILY CHART

The short-term FTSE chart shows a bold and confident drive up through all the Prior Highs that were established more recently.

The important support – combining horizontal and diagonals lies at 6350-6400.

Note though, the largely unchanged strengths relative to the S&P over the last six months. (of course vastly outperforming due to Sterling weakness in £ terms).

NB too, the better performance of the FTSE 250 both short-term and medium-term.

FUNDAMENTALS:

The UK economy has struggled to recover since the financial crisis hit four years ago. The previous Labour administration tried to pump up demand by increasing borrowing, but that was an attempt to cure the problem by the same means that caused it.

Now, almost three years into the coalition government and their austerity program, there still seem few indications that growth is about to return any time soon. In fact, most recent data releases point to a triple dip recession, which is a very rare event.

But the FTSE seems to be ignoring all of this and indeed appears totally divorced from the economy and is enjoying a strong rally; why when the government repeatedly refuses to change course and go for growth despite the calls coming from the CBI, IMF and other heavy weights.

The reason appears three-fold:

1.The US economy is showing signs that growth is starting to accelerate, indeed the most recent non-farm payroll report was much stronger than expected, sending US equities almost to all time highs,

2.The newly elected Japanese prime minister is dedicated to returning Japan’s economy to growth and defeating a two decades old deflation, and has appointed a governor to the Bank of Japan who supports his policies, and

3.The incoming governor of the Bank of England has made it clear he sees monetary policy taking a bigger role in getting the UK economy growing again, indeed before he even takes up his post the BOE/MPC has already begun exploring new policies tools that could be potentially deployed.

The impact on equity investors has been clear, they are bullish and of the three reasons mentioned above, the prospect of a strengthening recovery in the US has turned global sentiment positive.

A strong US economy is still seen as the locomotive of the global economy and with the Euro zone and UK economies stuck in the rut of recession, an external force is needed to drag them back to growth.

So although the UK economy currently flat-lines, traders are looking beyond current difficulties and are positioning for what they see as the next expansionary phase led by the US but perhaps supported by a re-invigorated Japan.

Moreover, if the US economy returns to normal growth rates, the Euro zone economy should benefit and since the Euro zone is a major UK trading partner, the benefits are clear.

Add in the FTSE’s international composition which means it is not a strictly domestic equity market and it becomes self evident why the FTSE rallies when the UK economy continues to face a 3rd recession in 4 years.

We judge the US economy is on the road to a full recovery.

We expect Japan to implement policies that will get the Japanese economy moving.

We also expect the new incoming governor of the Bank of England to stir things up at the Bank as he tries to kick start domestic growth.

In summary, the FTSE’s rally is tied to global events and they look set to improve and a new bull run in equity markets including the FTSE has already begun.

Next story:
20th Mar - EUR/GBP Now Pulling Back

Previous story:
15th Mar - Upward Momentum Draining From AUD/USD & NZD/USD

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