S&P 500: Closed for the week and month below its bullish trend line from March, signalling that a more pronounced correction is likely. Next key support levels to monitor are 1019 and 1000.
Risk aversion has come back to the forefront of market activity, signalled by the sharp rise seen in the VIX index. This has left the S&P 500 closing below its bullish trend line support from March signalling a more pronounced correction is on the cards. The equivalent trend line break for the FTSE 100 is not until 4750 but the move below 5000 which can be expected in early European trading is a psychological break which is likely to further dent investor sentiment in the near term. Overall, the market has been waiting for this correction to take place as investors question whether equity markets have discounted too much good news. This week’s key economic data will be instrumental in how pronounced this equity market correction is likely to be.
The economic data starts today with US ISM and pending home sales, both of which are likely to disappoint the market given the poor housing data from last week and the weakness seen in the NY and Dallas Fed survey. The FOMC meeting which ends on Wednesday is unlikely to mention any change in interest rate policy implying the accommodative stance will continue whilst the market is also expecting the Fed to upgrade its forecast of growth. Finally, the week ends in the US with non-farm payroll data. This data is expected to improve to -175K but could leave the unemployment rate rising to 9.9%. Meanwhile, in the UK the market is expecting the BOE, on Thursday, to extend quantitative easing by a further £50bn, as the UK economy remains in recession. Whilst the manufacturing and services PMI released on Monday and Wednesday respectively will provide some early indications of the outlook for the final quarter of the year. In Europe, the activity is less pronounced with the ECB expected to keep interest rates and its rhetoric unchanged.
As noted last week, the UK recovery is clearly lagging behind those of other developed countries and the outlook going forward remains pretty grim particularly given the state of the UK public finances. This has been highlighted again overnight by a Bloomberg article on a report released by Roger Bootle, Economic Adviser to Deloitte. If investors were in any doubt over the size of the barrier the UK has to overcome, Bootle analysis brings it into clear context. In his report Roger Bootle forecasts that UK public borrowing will rise to 15% of GDP this year and public debt is approaching 100% of GDP, leaving the public finances in “the worst shape for more than 50 years”. He adds, “Alistair Darling put some measures in place to address the situation in April’s Budget. But they did not go nearly far enough. We estimate that a further fiscal tightening worth some 5% of GDP per annum – or around £70 billion will be needed over the next five years, and possibly much more”. Finally, Bootle also notes that consumerrelated companies and sectors will be hardest hit by the squeeze with cut backs in public investment hitting the construction and transportation industries.
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.
