European indices continue charge higher as investors bet on QE3

European indices charged higher for a third straight session as investors bet on the Federal Reserve to announce a third phase of quantitative easing next month.

The FTSE 100 rallied near 2% on the day, added to yesterday’s 2% gains whilst the DAX and CAC both rose by 2.3% and 2.6% respectively.

Undoubtedly one of the drivers behind today’s gains has been hope that continued underperforming economic data out of the US will help to convince the Federal Reserve that they cannot delay any longer in announcing a third phase of QE to help support the financial markets and US growth. Allied to this is the fact that many investors may have been settling up their books for the month end, with today’s session marking the end of a terrible month for stocks that saw the FTSE 100 lose 7% in value, having lost as much as 17% in the first six trading days of August.

In what is becoming a trend of late, investors have reacted with somewhat perversely positive stock buys when US economic data comes in soft as they feel it helps to strengthen the case for the Fed to announce a third phase of quantitative easing. Today’s ADP employment data, which came in below market expectations of 110,000 to post an increase of 91,000 private jobs for August has helped to strengthen that belief, as did last night’s FOMC minutes which showed that easing solutions were proactively suggested.

On the flip side to the ADP Employment data however was the Chicago PMI, which came in stronger than the market had expected at 56.5 whilst US Factory Orders also rose stronger than consensus forecasts at 2.4%. That said, both sets of data remain at somewhat soft levels and when taken in the context of a broader softening of US data over the last few months, this does little to quell the argument to start QE, or at least that’s what trader activities this week suggest.This trader opinion may however change if we were to get a much stronger than expected non farm payroll report on Friday, with consensus currently expecting an increase of 75,000 payrolls.

FTSE nears key resistance levels
The FTSE 100 has started the week very promisingly, rallying 5% in just two days but the UK Index is now nearing key resistance levels that if the FTSE fails to clear, could trigger profit taking. The FTSE 100 needs to overcome near term resistance at 5400, which it failed at today, and key resistance at 5445 before the week’s bullish reversal of fortunes for the UK Index may convince traders that it has legs. With Non Farm Payrolls out on Friday, rallies are likely to remain highly volatile and indeed we did start to see some profit taking in the final hour of trading.