UK blue-chip shares were again reacting to political events early this week, and even more so after last night’s events in Paris.
The FTSE was verging on regaining poise lost when a snap general election was called on Tuesday. But it relapsed following news that a police officer was shot dead near Paris’s Champs-Elysee’s shopping precinct late on Thursday. The incident rekindled jitters that had been calming amid a run of reassuring earnings on Wall St, giving U.S. markets their best session in weeks.
Nerves subsequently kept the ‘cash’ FTSE 100 index near its Thursday close and handed the market its worst week in five, dragged by apparently resurgent sterling. The pound remains close to its best levels since September 2016 as the foreign exchange market retains a newly optimistic footing. Traders eye prospects that Britain can wrangle a good outcome from Brexit negotiations, if the ruling Conservative Party is re-elected on 8th June election with its strongest vote for 34 years, as per polling data.
British consumer shares also weighed on the benchmark, with Unilever and Reckitt Benckiser catching a chill on Friday from official retail figures showing the fastest quarterly decline since 2010. That was barely offset by giant miners like BHP and Rio. They tracked Chinese steel shares, steadying into the Asia-Pacific close as investors reasoned most exports of steel that will be the subject of a new trade investigation, actually go to Asia, and are not ‘dumped’; at least not directly.
Europe’s basic materials shares rose on Friday, though they still face a potential lengthy unwinding of interest and indeed prices that ran higher during the commodity complex’s recovery advance last year. In oil, market consensus may already have fractured. Shell and BP added weight as traders examined a forward curve that stubbornly tilts lower, regardless of OPEC member compliance (or the lack of it) with agreed supply cuts.
France first (earnings next)
This concoction of major influences coming to a boil as the earnings seasons picks up steam is sure to leave the market on edge whichever candidates France chooses on Sunday. Investors can therefore be expected to leap into action in one direction or the other at the start of next week.
The first watch though, will indeed be the outcome of the race for the election run-off. And that is largely between centrist Emmanuel Macron and Jean-Luc Mélenchon, given that prospects that far-right candidate Marine Le Pen will make the cut appear clearer. Campaigning between the main candidates was suspended on Friday, following the attacks, though far-right anti-immigrant leader Le Pen, still took the opportunity to insist she would end “Islamist terrorism”, whilst her chief opponent, Macron saw “no such thing as zero risk”.
Both candidates are now threatened by Mélenchon and a revivified Francois Fillon, the conservative whose polling figures have crept back up after taking severe damage amid scandals. The terror attacks however, do not appear to have had a significant impact on voter sentiment according to an Ifop poll released on Friday. It shows Macron leading with 24.5%, Len Pen on 22.5%, Fillon with 19.5% and Mélenchon on 18.5%. Only En Marche candidate Macron increased his lead in Ifop’s polling, by 0.5%.
There is evidence of deeper interest among institutional investors, chastened by last year’s anti-establishment shocks, in proprietary polling data and even algorithmic technology linked to voter sentiment. Fewer chances are being taken.
London equity investors will also have to contend with an intensifying earnings season next week, including all of the largest UK-listed banks, whose quarterly performance will inevitably be compared with their mostly forecast-beating U.S. counterparts. Bulge-bracket gains across the pond came despite renewed uncertainties over the Federal Reserve’s pace of interest rate tightening amid a flattening yield curve that damped loan growth.
From a technical perspective, the FTSE 100’s most liquid derivative, ICE FTSE Future, has settled into the narrow support zone that it last reverted to between mid-January and early February. Then, like now, the barrier appears to represent one of the market’s last flanks of defence against a deeper and faster correction, given that below the circa 7080-7040 band, the next level at which buying interest emerged was 6627-6680, in the immediate aftermath of the U.S. election. That support prevented a sustained breach of the 4th November low at 6627.
Small candlestick bodies representing the last three trading days of this week though, reflect a decline in position-taking among traders, pointing to increasing caution. Already depleted activity contracted further into Friday’s ‘spinning top’ formation. Typically, like many similar patterns that occur at the end of a trend, the spinning top is a sign of attrition, suggesting the move is losing momentum.
Naturally, there’s no guarantee that FTSE future’s decline off a record peak of 7445 in mid-March (mirroring the FTSE 100’s run of records that peaked at 7447 on 20th March) will end near current values. Notwithstanding the latest leg (since February 2016) of the market’s long-term uptrend and its resilience, overhead impediments are considerable.
The collapse triggered by Prime Minister Theresa May’s election announcement left a bitter taste in sentiment that will need unequivocal reassurance of a supportive fundamental event to alleviate. A win by the market’s preferred candidate in France, Macron, would do.
Even so, the fact that recent trading has largely been conducted at values within the tail of Tuesday’s candle, when volumes were thinnest, may point to activity that is least indicative of future direction.
Traders will also be wary of the 38.2% (7081) Fibonacci interval of the rise from a short burst of post-U.S. election mayhem on 9th November 2016, ending at March’s record high. The marker is unlikely to cage the FTSE future if the early hours of Monday morning bring news of a market-friendly outcome in France.
Even then, the reopening of trading on Sunday night, when political sentiment will be heightened and uncertain, is sure to equate to increased volatility. Note the FTSE’s implied volatility index, VFTSE (see top sub-chart) is close to its highest levels this year. It means FTSE options traders see the chances of a pronounced move in the underlying asset as higher than at any time in 2017.
On that basis alone, a reactive move could be sizeable.
DAILY CHART: ICE FTSE FUTURE INDEX
Source: Thomson Reuters and City Index
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