China move knocks equities – UK retail sales surge in January

<p>A move by China to curb escalating inflation by raising its bank reserve requirements by 50 basis points has knocked mining equities this morning, dragging […]</p>

A move by China to curb escalating inflation by raising its bank reserve requirements by 50 basis points has knocked mining equities this morning, dragging down European indices from fresh highs.

The move is another step by China to curb spiralling inflation and comes in the midst of three interest rate hikes since the end of last year. The move was not necessarily a surprise given China’s public change of stance to a more prudent monetary policy but all moves to curb inflation recently has seen a knee jerk defensive reaction in the market, and today’s reaction is no different. I don’t think one can interpret today’s selling in the mining sector as China being too aggressive to curb inflation and that metal demand could be significantly hit but nevertheless there is underlying trader tensions.

The mining sector is the key drag on European indices purely on the back of the move by China. The sector is lower in London by 2% with stocks such as Xstrata, Rio Tinto and Vedanta Resources all falling a similar amount.

We have seen traders continue to sell out of BAE System’s shares after their sales warning yesterday. BAE Systems shares have now been the top faller on the FTSE 100 for two days in a row.

The FTSE 100 remains locked in its trading range with a roof on gains at the 6100 level still firmly in place. Traders are seeking to see a close above 6117 to reaffirm the bullish bias whilst today’s bearish market is convincing that the UK index is likely to remain range bound. Most traders are seeing more potential for bullish price growth in indices outside of the FTSE 100 Index such as the Dow Jones, S&P or DAX and as long as the FTSE 100 remains range bound, this is likely to continue.

UK retail sales surge in January
Retail sales in the UK surged in January far beyond market expectations, with volumes rising 1.9% almost three times higher than the market had predicted. The figure was more of a positive for the pound sterling than equities however with the price of GBP/USD rallying from $1.6176 to a high of $1.6229 on the back of the number. It is prudent however to take this figure with a pinch of salt as much of the heightened volume is likely to have been created due to a lag of sales in December that was hit hard from the terrible weather conditions that forced shoppers to stay at home. That said, it does raise hopes that the previous quarter’s contraction in GDP may have been a one off if sales continue to pick up in February.

Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.