As long as the FTSE 100 holds above support at 4517 we remain in a third wave advance. The next barrier to overcome is resistance at 4675. With momentum overbought and light volumes still feeding through this barrier could become difficult to overcome. However, once broken there is little to prevent a further significant advance heading towards the first target zone of 5500.
It was not surprising to see some consolidation as we ended the month on Friday, but in a pattern that has now become familiar during the past few weeks both economic and corporate news were overall positive, and risk appetite should continue to increase through August.
On the corporate front, the S&P 500 has seen two-thirds of the companies reporting Q2 earnings with 74% beating expectations by an average of almost 14%. This is significantly better then the median on both accounts and to some extent highlights the overly negative sentiment that the market had predicted for Q2 which has proved to be too pessimistic.
On the economic front, US Q2 GDP beat expectations (as highlighted above) but the biggest surprise came through in the larger inventory liquidation (-$141.1bn versus -$87bn). This is a significant development and amongst the other components that are showing signs of recovery it means businesses given this sharp liquidation of inventories will have to restock in the future. This boosts the expectations that US growth could have returned to marginally positive territory by the end of Q4, much earlier then originally expected.
This week attention will be focused on the remainder of US companies due to report which include key stocks such as Procter & Gamble, Kraft and Cisco. During the course of the week, we have pending home sales, non-manufacturing ISM and ADP employment reports. The week concludes with the key release of US non-farm payrolls which is expected to show a decline of 325K and the unemployment rate rising to 9.6%.
In Europe, ECB and MPC meetings will be closely monitored. No change is expected in either although in the UK attention will be focused on whether the MPC tries to extend QE. Today, the UK starts the week with the release of CIPS/Market report on manufacturing. In June the output index moved above 50 indicating expansion for the first time © Brooks Macdonald Asset Management 2009 since March 2008. This helped boost investor sentiment but for now the market expectations is for a consolidation with the median expectation looking for PMI headline to rise marginally to 47.7 from 47. On Wednesday, the UK sees the release of CIPS/Market report on services. The robustness of this survey has not been reflected in official GDP figures, so again expectations are for a consolidation in this index with median expectations looking for a headline rise to 51.8 from 51.6. Also on Wednesday, industrial production will be reported with further evidence that the rate of decline is slowing expected to feed through. On Friday, we close the week with producer prices, weak pipeline inflation helped by the fall in oil is expected to continue.
Sources: Reuters, BBC, Bloomberg, Lawshare, Deutsche Bank (db), Proquote, Financial Times, Wall Street Journal, CLSA, Sharescope, Market News, Capital Economics, CNBC, Wikipedia.
Please note this report provides a guide to some of the relevant areas that individual investors should consider discussing with an authorised adviser in relation to their specific circumstances, it does not constitute individual advice. As a result no action should be taken or refrained from being taken as a result of its content.
