FTSE gains 35pts but eyes on the Fed

<p>European markets have had a broadly flat start to the session as investors show caution ahead of a busy macroeconomic day. Early attention focused on […]</p>

European markets have had a broadly flat start to the session as investors show caution ahead of a busy macroeconomic day. Early attention focused on the latest Bank of England minutes from the June meeting and then Federal Open Market Committee (FOMC) decision later today after the UK close.

The FTSE 100 experienced a slight pull back in early trading following a strong previous session which saw the blue chip index close up 1.7% just below 5600, a level which it crossed earlier that day for the first time since May. Investors were pushing the markets higher on strong hopes for further stimulus from Central Banks; this coupled with the fall in inflation here is the UK gave investors further reason to believe that the Bank of England will consider a further injection of liquidity sooner rather than later.

With this in mind the BoE minutes were eagerly awaited this morning and news that four members of the bank’s Monetary Policy Committee voted in favour of an increase in the asset purchase programme was met with cheer from investors and early losses were soon erased. A clear message was also that events over the next few weeks in the eurozone could have a large impact on any decision taken and therefore waiting to see how these develop could be essential. The markets have risen on the assumption that further stimulus will take place, despite a lack of definite confirmation, so any comments to the contrary will have the effect of bringing the markets crashing back down. We could now be looking at a potential increase of £50bn in asset purchases by the Bank of England in their next meeting on 5 July.

A similar situation has arisen in the US. Recent economic data from the US has indicated that there may be signs that the US economic recovery is losing steam and the markets have now risen fairly strongly on hope that the Federal Reserve will feel compelled to launch a new round of monetary stimulus.

An extension of Operation Twist is very much expected, this is where the Central Bank sells bonds with maturities of three years or less and buys securities of siz years and longer in an attempt to shield the fragile economy from the prevailing winds from Europe. Again as with the case in Europe, as the market has risen on assumptions that the programme may be extended, any failure to announce or even hint towards this or other stimulus measures could trigger sharp reversals in the market.

So a cautious slow day for equities is expected and any further developments on the Greek coalition government formation could add further optimism to the session. Risk is back on for now, though much of trading remains short term in nature. From a sector perspective it’s the miners that take the leader board for the FTSE and defensive stocks are proving a drag.

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