FTSE 100 rallies 0 8 on stimulus hopes

The FTSE 100 and broader European indices climbed on Monday, with the UK Index gaining 0.8% as investors reacted to weak Chinese manufacturing data on increased optimism that China would act in the form of extra stimulus, whilst the ECB decision on Thursday continues to inspire confidence that the central bank will announce plans to intervene in the bond markets.

The reaction to the data out of China is yet another example of investors reading into the positives despite a somewhat bleak backdrop of economic activity. A final reading of HSBC Chinese manufacturing PMI fell to 47.6 from 49.3, hitting its lowest levels since March 2009 and marking a tenth successive monthly deterioration of conditions.

Yet still investors continue to use weak Chinese data as a sign that the country will be forced to ramp up stimulus plans and it is this optimism that has helped to increase demand for heavyweight miners in trading. The FTSE 350 mining sector rallied 1.2% as a result, giving heavyweight support to the FTSE 100 with stocks such as Fresnillo, Vedanta Resources and Kazakhmys rallying between 2% and 4%.

We of course also have the ECB decision to come on Thursday, where there will be even more pressure on Mario Draghi to announce plans to buy stressed sovereign bonds as well as a swathe of economic data this week including ISM manufacturing out of the US tomorrow as well as US non-farm payrolls on Friday.

Patience could be running thin for Mario Draghi to deliver on his previous claims to ‘do whatever it takes’ to preserve the euro. Whilst the markets are hot with anticipation that Draghi and the ECB will act, there is also the potential for a ‘buy the rumour sell the fact’ scenario, particularly if the ECB refrains from announcing the much anticipated plans on Thursday or if the scale of the plans is seen as too weak.