Recent market movements have presented day traders of equities with a real opportunity to test their nerve in fluctuating conditions. In the UK, valuations remain low but the spectre of eurozone difficulties has ensured share prices remain unsteady. Despite this, traders believe that the negative sentiment arising from the eurozone alone is insufficient to suppress UK equities throughout the year.
The European Central Bank’s newly introduced long-term refinancing operations (LTRO) ensured that the continent’s banks have an additional crutch on which to lean that has, in turn, meant that sovereign debt issues are now not as important as they once were. Despite being much further from home, a bigger issue for the prospects of the FTSE 100 is any slowdown in Chinese growth. As the world’s fastest growing economy, China demands a huge amount of physical commodities – metals particularly - and this is where the prospects of China and the UK’s blue chip index interlock.
Joshua Raymond, chief market strategist at City Index, says with many London-listed heavyweight resource firms having a strong Asian presence, the outcome here is vital. He explains: “The prospects of FTSE 100 are strongly intertwined with Chinese growth and whether Chinese growth hits a hard or soft landing later this year. “Chinese growth is currently targeted to slow from 8 per cent to 7.5 per cent, though naturally much investor focus will be on Chinese monetary authorities, who are typically quick to react to any slowdown through policy action.
“Therefore Chinese interest rate cuts, along with other stimulus attempts, are going to be an important feature for London investors.” However, the fears that China’s fiscal strategy may go too far and cause an economic slowdown on its own have also been overblown, according to analysts.
The prospects of FTSE 100 are strongly intertwined with Chinese growth and whether Chinese growth hits a hard or soft landing
Elsewhere, the US stock market has seen an impressive rally since its October low. Earlier this month, the Dow Jones Industrial Average broke the 13,000 mark for the first time since the credit crisis which got traders trying to second guess the next wave of bad news. According to BlackRock’s chief equity strategist, Bob Doll, it is important to note that while markets are in the same place as they were last April, earnings are up nearly 15 per cent since then.
He says: “The October market bottom seemed to have technical characteristics of an important low. While there remain plenty of problems, including rising oil prices and profit margins at very high levels, we recommend overweighting equities.”
Doll’s bullish view is echoed by City Index’s Joshua Raymond who says the US economy is now seemingly on a healthy recovery trajectory. He explains: “The US unemployment rate has continued to fall on an almost monthly basis from the 2009 high of 10 per cent back towards the 8 per cent level recently, which has been very welcome for a number of reasons.
“A recovering labour market in the US, a crucial benchmark for the economies of the developed world, breeds business confidence while it can help to facilitate a recovery in the US housing market and consumer spending, which both play an important role in US growth. Any chart of the US unemployment rate and the Dow Jones will affirm the correlation a strong labour market has on US economic prospects.”
One final consideration is the ongoing tensions in relation to Iran’s nuclear programme. Noises are beginning to sound that markets may have underestimated the impact this could have on geopolitical tensions and the subsequent effect on global growth. Whatever happens, negotiations with Iran will be key to market movements and those global equities linked to oil prices.