FTSE can climb without copper plating

<p>Strikes are bad for business, so it’s debateable how long mining investors will continue to applaud the stoppage at the world’s biggest copper mine that is keeping shares of mining giants BHP, Rio, Glencore, Anglo and others aloft.</p>

Copper supports miners for now

Strikes are bad for business, so it’s debateable how long mining investors will continue to applaud the stoppage at the world’s biggest copper mine that is keeping shares of mining giants BHP, Rio, Glencore, Anglo and others aloft.

However the commodity price lift has another leg. U.S. miner Freeport-McMoRan said on Monday afternoon that it has yet to reach agreement with Indonesia’s government on a new mining permit. That keeps in place a ban of copper exports from the world’s second-biggest mine for the commodity, after Chile’s Escondida. Copper hit its highest prices since May 2015 earlier, extending a 5% jump from Friday. It’s an instant price rise for miners, though at some point, if labour and political bottlenecks are not removed from supply chains, shareholders will eye potential negative impacts on output targets. There are no immediate signs of resolution in Indonesia or Chile.

The fact that miners are doing the heavy lifting for Britain’s top stock market—accounting for the biggest positive percentage contribution to the FTSE 100 on Monday—will show when that lift fades. A benign global backdrop for equity sentiment—see the return of the ‘Trump trade’—is also being welcomed. Trump does however remain an unpredictable variable. He’s demonstrably capable of backtracking on prior policy signals, whilst doubling down on guidance in other areas. For instance, having hinted soon after his election that parts of The Affordable Care Act (Obamacare) might be retained, he has since reaffirmed that he wants to ‘repeal and replace.’  Ironically, the apparent about-turn of the administration in its stance on China, and even Japan, after insinuations of ‘currency manipulation’—a big relief for global markets—might not be Trump’s last word.

Earnings turning

Even so, there are signs of strengthening long-term confidence among the largest holders of blue-chips, despite Brexit uncertainty. Institutional holders currently expect earnings of the largest-listed London shares to rise by 75% year-on-year. That points to underlying support regardless of niggling global uncertainties, particularly after Reuters’ latest fund survey showed British funds lifted equity allocations to eight-month highs. A strong earnings season will also go some way to removing wariness over the highest price/earnings ratios for decades. On Friday, the FTSE was trading at almost 33 times earnings on a 12-month trailing basis. Whilst down from almost 40 times late last year, the ratio is still close to the highest in a decade. Stronger earnings will therefore reassure investors, particularly as the correlation between weak sterling and FTSE 100 gains is becoming weaker. Perhaps it may also encourage overseas funds back into UK stocks as well. Record outflows by foreign holders following last June’s referendum left British blue-chips largely in the hands of domestic names.

Some pain, some gain

Technical chart dynamics in the FTSE’s most liquid derivative, ICE FTSE Futures, suggest increasing confidence that the underlying gauge will continue to grind higher, so long as its clearest rising trend remains intact.  A painstaking tendency remains evident too. Note that there have been only a handful of sessions so far in 2017 which have seen the futures contract and the index hold on to intraday gains of more than 0.5%. On Monday however, having tested liquidity corresponding to the high on 19th January, the futures have advanced further, closing in on levels that would equate to the FTSE 100’s latest all time peaks on 16th January. The contract has progressed past 7197, a region where offers were very probably concentrated, judging by the speed of the slide under those levels in January. Momentum—meaning the speed and strength of price improvement—also looks supportive for the futures contract and index right now. The Relative Strength Index (RSI) sub-chart below has unwound from mid-January levels that were its most intense since the late 1990s. Yet the market has only lost altitude moderately, and the gauge is no longer ‘overbought’. These are excellent criteria for continued gains in the near term, whilst the gauge is pointing higher. A break below 7197 would be the clearest near-term signal that a climbing scenario has been invalidated.

 

 

ftse future daily_VERSION2_1752gmt 13022017

Source: Thomson Reuters, City Index

 

 

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