The FTSE failed to confirm a break above its 5281 resistance level yesterday. Only when this level is broken will the third wave be able to extend its rally since July.
Central banks again took centre stage from another round of Fed official’s comments, ECB member’s comments and of course the BOE Inflation Report; all of which provided a dovish and rather uncertain outlook going forward. This again leaves the markets in a scenario of whether the glass is half full or half empty. The dovish comments provides some comfort that exit strategies from the accommodative stance taken in the US, Europe and the UK are unlikely to be relinquished anytime soon; or on the flip side given the “fragile” outlook to the recovery possibly too much good news has already been discounted.
To some extent the price action yesterday reflected this uncertainty. During the course of the morning session the FTSE 100 broke through its resistance at 5281 but failed to sustain this break by the close. A similar pattern arose in the S&P 500 which struggled through its resistance at 1098 but failed to close above it. In Asia, overnight the Hang Seng has suffered similar challenges. From a technical perspective, all this could be viewed as the tipping point of what we can expect as we head into the end of the year. Thus, it is important that on the next rally these breaks are held if the third wave is to extend before the end of the year otherwise a long month and half of consolidation is likely to emerge.
Out of all the central banks reports and comments yesterday, arguably, the latest BOE inflation report remains the most important. In the report, the BOE became more optimistic on growth prospects now forecasting growth of 2.1% in 2010 previously predicted at 1.9% and 4% in 2011 previously predicted at 3.1%. The report did note some headwinds particularly the need for continued balance sheet adjustment, limited supply of bank credit and fiscal consolidation. Regarding inflation the BOE forecasted a much sharper rise in inflation mainly due to base effects and VAT changes coupled with the fact that inflation, partially down to the weaker sterling, has remained higher than expected given the spare capacity in the economy. The BOE report forecast that inflation could rise to 2.7% from its Q3 average of 1.5%. Importantly, though the Governor King highlighted in his press conference that the MPC would probably look through the expected volatile movements in CPI.
Indeed it was the press conference that provided most interest. King in his comments did not rule out another round of quantitative easing which sent sterling tumbling; meanwhile, the comments on looking through the inflation rises triggered a rally in the front end of the Gilt curve.
Sources: Reuters: BBC: Bloomberg: Lawshare: Deutsche Bank (db): Proquote: Financial Times: Wall Street Journal: CLSA: Sharescope: Market News. Capital Economics: CNBC: Wikipedia:
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