Good morning. The pattern for yesterday was similar to Friday with a strong start, retrace back down, rally towards the US open then an aggressive decline into the close which was approximately 5872. It shows there are many professionals who are happy to sell into any rally and with novices usually trading at the open this pattern confirmed the negative tone to the markets. At some point this pattern will be broken however it will need a big injection of good news to do it. We did see a decent bounce off the double bottom low at 5840 later in the evening, and sometimes the Monday before option expiry can mark the low point – we will need to see if we get much of a rise during the rest oft he week to see if thats the case this time.
US & Asia Overnight from Bloomberg
Emerging-market stocks retreated to the lowest in more than six years and currencies weakened as concern that China’s growth outlook is worsening and a commodity slump pushed investors away of riskier assets.
All 10 industry groups in the MSCI Emerging Markets Index fell as a gauge of energy companies fell to the lowest since September 2004. Philippine shares entered a bear market as Chinese equities on the mainland and in Hong Kong led a rout in Asia. The dollar-denominated RTS Index of Russian stocks plunged 5.1 percent as Brent crude sold for less than $32 a barrel. The ruble fell to its weakest ever against the dollar as trading resumed following a two-day holiday. A gauge of developing-nation exchange rates declined for a seventh day to a record low.
Volatility in Chinese markets has sapped risk appetite globally as extreme swings in local assets rekindle concern about the government’s ability to manage an economy forecast to grow at the weakest pace since 1990. Data over the weekend showed consumer inflation remained at about half the official target while producer prices fell for a 46th month, fueling speculation that the slowdown is deepening.
“The weakness in both the A-share market and the oil price would be the two lead indicators today,” said Tony Hann, the head of emerging equities at Blackfriars Asset Management Ltd. in London, referring to stocks traded on exchanges in mainland China. “Both are perceived as symptoms of weak growth,” said Hann, who is avoiding energy stocks in favor of consumer-oriented assets.
Valuation Discount
The MSCI Emerging Markets Index decreased 2.3 percent to 723.36, dragging the average valuation of its member stocks to 10.3 times projected 12-month earnings, the lowest in more than four months. That represents a 30 percent discount to the MSCI World Index of advanced-nation shares. [Bloomberg]
FTSE Outlook and Prediction
We had a very good bounce off the double bottom low at 5840 last night, and the usual overnight declines haven’t been as steep as they have been so far this year. As such, if we test 5850ish then I think that this is worth a long around here for a run to 5900+. Initially the 10 and 30min charts are showing as bearish, but with resistance on both around the 5900 level so this is the key level for the bulls to break this morning. Interesting article from Goldman Sacs here – the others are all in panic mode (RBS said sell everything yesterday for example). If 5850 breaks then the bottom of the 20 day Bianca is 5822 so we will more than likely see that level (we also have the 20 day Raff at 5813) so it might be worth starting to think about fading in some swing longs around this level. Below that then 5750 is the bottom of the current 10 min channel. The bulls do have a bit of a job on their hands though as the top of the 10 day Raff is at 5915ish, hence the profit taking on that rally last night. I am thinking that 5850 is likely to hold this morning.