It’s not a pretty sight with every single sector in the red this morning only serving to prove that yesterday’s bounce was a short-lived relief rally based on very little but hopes for more Chinese stimulus. Any traders who established new long positions yesterday are quickly learning that hope is a poor investment strategy.
The FTSE is now on a rush towards the 5600 level led by downside in the materials and financial sector and the flight to government bonds, gold and the Japanese yen is conspicuous. USD/JPY dipped at 116.42 – a stone’s throw from Aug’14 low of 116.18 and the technical and indeed fundamental outlook suggests that additional strength in the yen is very likely.
The FTSE 100 closed at 7103 on 27/4 and now sits at 5711 - -19.6% so we’re only a hop skip and a jump from bear market territory.
So for all intents and purposes, the FTSE is now in a bear market and should we close below 5700 – a psychological level in itself we may well see the 5620 level and even sub 5600 (200 Month Moving average) in a very short time.
The FTSE 250 by contrast, is down 13.7% from its close on June 3rd last year We must bear in mind that the stock market is not the economy and vice versa but negative sentiment emanating from risk asset declines can find its way into the broader economy.
The UK benchmark is not alone – we see India’s Nifty Fifty, China’s Shanghai Composite and Japan’s Nikkei all down 20% or more from their highs.
Context is important. The FTSE rose over 100% from the lows in March 2009 – yes this was aided by low interest rates and QE which underpinned the chase for yield- even in risk assets. In fact, the Fed QE programme which was part of the solution at the height of the crisis no inhabits a big part of the problem. The yield chasers pushed capital to emerging markets – and some would have done well – but cyclical changes, a change in Fed policy in the need to return to normalisation has only boosted dollar strength and contributed to decline in commodity prices.
The one rising stock (for now) in the equity space is Randgold Resources (L:RRS) (+0.16%) rising marginally as gold pushes back higher towards $1100/oz.
Investec has taken a red pen to a myriad of stocks downgrading Lonmin (OTC:LNMID) (-5.48%) to sell with a price target of 28.90p, Anglo American (L:AAL) (-6.32%) to sell with a price target of 152.00p and BHP Billiton (L:BLT) (-5.77%) to sell with a price target of 581.00p.
The other miners are no better with Glencore (L:GLEN) (-6.2%) and Fresnillo (L:FRES) (-4%) all residing near the bottom of the index.The latter plans to up its gold and silver production.
Defensive stocks are faring better in the sense that they are outperforming the broader index but there still losses.
SSE (L:SSE) (-0.7%), Severn Trent (L:SVT) (-0.76%), Imperial Tobacco (OTC:ITYBY) (-0.9%)
BAE Systems (L:BAES) (-1.92%) Berenberg has stated that it is overweight in defence and reiterated a buy with a PT of 570p implying circa 10% upside.
Wetherspoons (-9.12%) said like-for-like sales improved in the first 12 weeks of the second quarter but that operating margins would be 1.1% lower than the same period last year due to increased labour costs.
We call the Dow lower by 300 points to 15697.