FTSE 8217 s Next Destination

The FTSE rose as much as 7% this year to hit its highest since May 2008. After lagging most of its global counterparts in H2 2012, the FTSE made up ground and is now among the highest performers year-to-date. Eight consecutive monthly gains in the index have not been seen since 1987. One of the factors impacting the FTSE this week is the Bank of England.

Wednesday’s release of the Bank of England quarterly Inflation report is likely to reiterate the central bank’s expectation that inflation is to remain at or below the 2% target within two years and that growth should stay sluggish. The two main questions are:
1) what’s the likelihood that the surprise 0.4% contraction in Q4 GDP shall remain below negative once the revisions are released; and;
2) what measures will the BoE adopt in order to deliver more growth?

The second question will be tackled by BoE Governor King in his testimony following the release of the inflation report, where he will undoubtedly be asked for suggestions he may pass on to his successor Mark Carney. The latter told us last week he will keep his options open regarding policy targeting, with any shift towards nominal GDP targeting is likely to be a last resort. When all is said and done, a new prolonged dosage of QE would be the most likely rout (around £400-425bn) before any thinking outside of the box is undertaken by the new Governor.

Our prolonged bullishness on the FTSE last year argued in this column on August 10, October 25 and December 11 was partly based on the lag of the FTSE-100 with relative to its European and Japanese counterparts. Prospects for further QE and the relaxation of Basel rules in giving banks more time and flexibility to build up cash reserves are likely to further boost the banking part of the FTSE. The British pound may survive its four-year trendline support against the US dollar, but prolonged sluggishness below 1.60 may remain a positive for British exporters.

After eight consecutive monthly advances, we expect the FTSE to continue consolidating between the 6190-6300 range for most of the month before a break-out is likely to ensue past the 6370s near end of April, which marks the gateway for 6470. Key support emerges at 6170—the trendline support from the November low, a break of which risks calling up 6050.