FTSE 100 Softens More than Was Suggested by Commodity Markets

2016-02-03 09:08:00

Alejandro Zambrano, Market Analyst

Talking Points

The biggest drag on the FTSE 100 total returns over the last week is the Basic Materials sector, which again highlights the link between the FTSE 100 and commodities.
The technical trend for today is neutral to bullish above the 5866 low, bearish below.
Fair-value-model using the Bloomberg Commodity index suggests that the FTSE 100 should be trading closer to 5980.
Caixin China PMI Services Rises, U.S. ISM and ADP on deck this afternoon.

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Unsurprisingly, the biggest drag on the FTSE 100 total returns over the last week is the Basic Materials sector, with median shares losing 2.59% of their value. The median Consumer Goods sector shares have risen by 3.98% over the same period and is by far the strongest sector.

This highlights the particular link between the FTSE 100 and commodity prices, which are once again under pressure. This has caused the FTSE to slide below last Thursday’s low of 5887 and by doing so has potentially ended the bullish rally that was started on January 20.

The technical trend for today is neutral to bullish above the January 27 low of 5866. The FTSE may recuperate some of yesterday’s losses and reach the psychological level of 6000, while a break to 5866 should make it relatively straightforward for the index to reach the January 26 low of 5771.

My fair-value-model using the Bloomberg Commodity index suggests that the FTSE 100 is slightly oversold and should be trading closer to 5980, while the FTSE’s correlation to the DAX 30 suggests it should be trading at 5917 (in other words the FTSE 100 is in line with the DAX 30 at current levels).

Caixin China PMI Services Rises

A strong bounce in the Caixin China PMI Services takes it to 52.4 from 50.2, Japan PMI Services rose to 52.4 from 51.5, while German PMI Services declined to 55 from 55.4. These reports are strong and stock market supportive.

U.S. ADP and ISM Services on deck this afternoon and key for stock markets, the former is expected to print 193K according to a Bloomberg News survey, while the latter is expected to soften to 55.1 from 55.3.

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FTSE 100 | FXCM: UK100