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A roller-coaster ride for markets this week and a perfect example of how important central bank communication (read US Federal Reserve) has become and how markets can move indiscriminately on changes in sentiment regarding the future of the highly accommodative monetary policy (read Fed’s QE3), something that has supported the global rally and recovery hopes since the middle of last year as opposed to improving fundamentals. While headlines focus on the big share price falls of the last 2 days from near/above all-time highs, bear in mind that the reversal comes after a very steep run-up which had been displaying warning signs of exhaustion – something we highlighted earlier in the week.
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It’s not been pretty, but it could have been worse. The round trip on the FTSE 100 also puts it down just 1.0% over the week. The 3.5% decline from 13.5yr highs has been sharp, and no doubt hurt those who had only recently joined the rally, but must be looked at in relation to 1-month gains of 10%. This had taken the index to within 60pts of all-time highs, helped by easy money policy and an appetite for better returns from equities over bonds. The rally from last June also remains intact, and note that gains of 14% to last September and another 16% to March were both digested by retraces of 5%.
This correction thus looks healthy and could even go as far as 6,550 before we resume higher. Markets are scared of the Fed taking away the QE3 punchbowl as US growth/jobs data improves, but removal of this market prop is a way off yet. Data remains mixed and Fed Chairman Bernanke has highlighted flexibility to both increase and decrease the rate of intervention. Until we see the extent of the first tapering/trimming to QE3 as data improves, concern looks overdone. Are we really to fret about a slight trimming to QE3? Some bad data could easily see it reversed and even increased soon after. It’s still early days, but be prepared for continued swings.
Few stocks have helped support the index this week, with BP’s 1.6% rise and positive 5.3pt index contribution the best showing, helped by news on production and plans in Iraq and despite volatility in the price of oil, as the USD rallied on the possibility of the US Fed reducing its dollar-weakening asset purchases (QE3) sooner than expected on better US macro data; making dollar-denominated commodities more expensive. Nonetheless, note the limited move in the price of Gold, with less demand for the yellow metal as a safehaven as fears of global collapse recede and the need for it as an inflation hedge has become redundant, for now anyway.
No surprise that the other helpers were Defensives, living up to their name, with GlaxoSmithKline (GSK; +1.5%; 4.8pts) helped by and the award of up to $200m by the US to develop a new antibiotic, Imperial Tobacco (IMT; +4.5%, +3.9pts) and Reckitt Benckiser (RB; +2.3%; +3.0pts) both benefiting from the general market rise and search for yield before the market reversal, and Shire Pharma (SHP; 5.5%; 2.5pts) continuing its recovery to February highs, helped by another broker update early in the week.
Those weighing most on the index included heavyweight HSBC (HSBA; -4.0%; -20.5pts) with appetite dented by growth concerns in Asia where the bank has a big presence after weak China data and despite some positive broker comment with some suggestions of weakness ahead of today’s AGM and the possibility that the bank’s proposed US settlement over money laundering could be rejected, leaving it open to criminal charges and even a ban from the US. SAB Miller (SAB; -5.23%; -10.6pts) suffered after disappointing FY results added to negative momentum from the prior week while Standard Chartered (STAN; -5.0%; -7pts) was hindered by general market weakness and Chinese/Asian data and Lloyds Banking Group (LLOY; -4%; -6pts) saw market weakness on the Fed tapering fears overriding good news on capital requirements and broker upgrades. Vodafone (VOD; -1.45%; -5.1pts) turned back from 12yr highs after FY results which included no news on its Verizon Wireless JV stake.
It’s been a busy week and I for one will be thankful for a three day weekend to digest and further reflect upon whether the long-term rally has legs or indeed this correction is the start of something more significant. Much to ponder over. Let’s see what I’m thinking by Tuesday on CNBC’s Squawk Box Europe and what the drivers are for the new week.
As always, have a great weekend.
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