FTSE tie to China will keep dragging

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By :  ,  Financial Analyst

The FTSE outperforms on Tuesday is probably not beginning a sustained revival.

Trading up

On the one hand the FTSE 100 may be finally shaking off the funk that has seen it underperform large-cap developed market peers. On the other, it’s simply too early to know whether global growth concerns underlying the index’s sluggish start to 2019 are abating. True, it’s notable the FTSE, like most European and global markets, appears to shrug off the latest twists in U.S.-China relations. The FTSE somewhat outpaces continental gauges with a 1.3% rise as I write. The Huawei case, that has now progressed to charges against its CFO, Meng Wanzhou, whom the U.S. seeks to extradite from Canada, upended equity markets late last year. But now, a trickle of concessionary signals from both the U.S. and China helps keep the narrative of a deal on track. High-level talks in the next couple of days should still pave the way to Xi-Trump discussions, perhaps as early as mid-February.

Attractive

The FTSE’s strong tie to China as buyer of its resources, capital goods and consumer products of the index’s multinationals looks in play on Tuesday. FTSE’s recent sluggish track record relative to principal indices in other developed economies suggests it could be attractive as a reversion play as well. And, as the Fed, ECB, and BoJ layer fresh accommodation, the stage could be set for renewed reflationary impulses. We could also throw in Brexit. With soft options for Britain’s departure gaining increasing currency as Parliament debates amendments that would severely tone down Theresa May’s EU withdrawal Bill, large UK-domiciled funds which saw big outflows in the wake of sterling’s post-Brexit vote collapse could now be well-positioned for a rebound of inflows.

Growth questions

Growth is the main sticking point. If anything, pointers on China’s economic slowdown have become more emphatic rather than the opposite in recent months. Further afield, even the usual lag exhibited by IMF forecasts relative to those of banks and even some governments has now passed. The institution cut its 2019 global GDP call last week to 3.5% from 3.7%, though naturally, it is still up to 0.9 of a percentage point behind many high profile banks and other forecasters we observed. Slowdown scenarios within 18 months for the U.S. and Europe are no longer on the fringe. That is not the same as saying that economic downturns are inevitable. What is clear though is that risks almost inevitably lie to the downside after a decade-long global recovery. These, and the FTSE’s unequivocal link with China, make it difficult to see Tuesday’s uptick as pointing to sustainable FTSE upturns just yet.

Thoughts on FTSE’s technical chart

To corroborate its fundamental recovery scenario technically, the FTSE’s key futures contract, shown in the chart below, would need to capitalise on the floor established at the beginning of the month near 6627. The support was the launch point for a recovery, on 4th August 2016, less than two months after Britain voted to leave the EU, following an immense, though thankfully short-lived, stock market sell-off. Overhead lies the top of the declining channel etched out from last summer to date. It is bisected by short-medium term resistance around 6900 that was formerly support. A long-term trend indicator, the FTSE’s 200-day moving average, continues to provide flattish and so mixed signals. It has taken a visible turn for the downside since October, if not a particularly steep one. Rallying oscillators like slow stochastics frame a current window of potential revival. The real test will be whether the market can top and sustain above the technical challenges outlined above.

Source: Refinitiv/City Index


Related tags: Shares market UK 100 UK Brexit

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