UK Stocks: Where Are We Now?

Who’s the daddy? This week finishes with the month’s economic heavyweights; interest rate decisions in Europe and the UK on Thursday, followed by US Payrolls on Friday.

Since the start of the year the Dow and Dax have collapsed by over 1000 points from peak to trough; the FTSE slid by a more sedate 700 points. Dramatic stuff, huh?

Well yes, and a New Year’s resolution to go short would have set you on your way. But strip out the silly Christmas period and the markets have made as much progress as a hamster on a wheel.

So, after a news-packed start to the year now seemed a good time to grab a coffee and ask, “Where are we now?” Today I’ll be casting an eye over the main equity markets. Tomorrow, time allowing, I’ll look at the main currencies.

January in 30-seconds
The Bank of England and European Central Bank both cut rates by 50bp (the US didn’t have any rates left to cut). Fresh stimulus and bailout initiatives were announced almost daily around the world. Spain, Greece and Portugal saw their sovereign debt downgraded, Ireland was shown a yellow card, but kept its top rating for now. This raised the cost of their sovereign debt, which in turn was bad news for equities in these countries. The trouble is, a lot of corporate debt is priced at a percentage over the sovereign debt, so what happens in the bond markets hits companies’ bottom lines. Banks featured heavily, with Anglo Irish being nationalised and traders slashing the prices of RBS (RBS), Lloyds (LYG) and Barclays (BCS) on fears that they would end up in government hands. Economic data painted a worsening picture, made bleaker by colossal job cuts spanning the globe. Equities had a lousy month; the S&P 500 had its worst January in history, falling by over 8%.

Let’s Have A look At The Charts
In relative terms the UK had a result in January, a paltry 280-point fall, just -6.5%, compared to the Dow (-690 points, -8%) and the Dax (-470 points, -9%). The bulls manfully defended the 4000 level, and although the bears broke the line on one occasion they were unable to set up an overnight camp. The return journey fell flat just above 4300.

By contrast, the Dax fell to within 30 points of November’s low as the repercussions of the ECB’s intransigence became all too clear. The ensuing bounce lacked conviction, but neither has there been a return to the lows.

Although, technically, the Dow remained over 400-points off its low, if you strip out the 20th November option day nightmare (which reversed with an engulfing candle the following day) it’s been dragging along the bottom. Although it found friends below 7900, there’s been little enthusiasm so far above 8400.

In short, the main equity markets are stuck in a trading range with little directional help from their technical indicators. True, the 14-day and 21-day moving averages are sloping down, though not dramatically, but the RSI and MACD indicators aren’t too convincing.

What Matters This Week?
Interest rate decisions in Europe and the UK on Thursday
US Payrolls data on Friday

Not long ago these releases would have had traders tingling in anticipation. Unfortunately, like a Man Yew, Chelsea clash, these events are unlikely to live up to the rap.

Interest Rates
First off, the UK’s Monetary Policy Committee is odds-on to deliver a 50bp cut, taking rates down to 1%. Strangely, there have been pleas from some quarters to leave rates where they are; the rationale is that the cuts don’t feed through to borrowers, but do hit savings accounts. I’m not even sure how a ‘no change’ decision would affect equities- in theory it would knock them back a bit. But, companies stand to benefit more from news about the UK government’s plan to buy corporate bonds, which would reduce the cost of raising new capital.

The European Central Bank’s announcement has already been billed as a non-event, by order of Monsieur Trichet. The fun and games will be reserved for the press conference that follows, where the little Frenchman might shed some light on what to expect in March.

Non-Farms
Friday’s Non-farm Payrolls probably remains the month’s key release. The problem is that with a ballpark 500,000 of job losses already factored in, it will need something substantially worse to really scare the market. I’m guessing it would take a figure of 600,000 plus to shake the market, though there’s always scope through the revisions or change in unemployment rate.

Playing Chicken
The old adage that the stockmarket leads the economy out of recession has resulted in a game of chicken for grown-ups; is there time to sell again before the first chinks of economic light shine through? The emphasis will change from significant, but historic, numbers like GDP and unemployment to forward looking sentiment indicators, and of course any signs of a turn around in the housing market. I don’t know if the Obama giveaway (last seen at close to $900 billion) will still excite equities; equally, what bad news is left that still carries a worthy shock value, nationalisation of a UK bank?

Several equity analysts reckon that the main markets represent fair value at these levels. Given the ongoing economic troubles, personally I’d put as much faith in equity valuations as I did in Britney Spears claiming she was a virgin all those years ago. I’m not an equity analyst, but I reckon it would be remarkable if the bear market ended bang on fair value; the nature of markets is to overshoot in either direction.

Cards on the table, I’m short and reckon equities need to go lower before they rally in a meaningful way. I’m a bit concerned at how well the 4000 level on the FTSE is holding up, just like the 800 level on the S&P 500. But the S&P did fall in January, so it should end the year lower.

Tomorrow I’ll be having a look at the forex market.

Subscribe by RSS Subscribe by Email