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Is the FTSE Rally Sustainable?

Since the beginning of June, the large-cap FTSE 100 index has rallied by 10%

Alanna Petroff 10 August, 2012 | 1:22PM

Most stock movements this week were relatively tame, with the exception of Standard Chartered’s (STAN) week-long wild market ride. But looking at the bigger picture reveals a different story: since the start of June, the large-cap FTSE 100 has rallied by 10%. Many are now wondering whether the index can keep powering higher.

“To answer this [question about a continuing market rally] we need to find out why stocks have rallied in the first place,” states Kathleen Brooks, research director at GAIN Capital. “US stocks have been boosted by 1, signs of a pick-up in growth in the second half of the year as the labour market improves, and 2, some stabilisation in the eurozone sovereign debt crisis in recent days. These are perfect conditions for stocks to rally and investor confidence to remain high. While growth in the US seems to be ticking up, which may boost corporate profit growth for the rest of the year, the biggest risk is the eurozone debt crisis. It may have stabilised now, but the crisis is far from resolved and concerns could flare up again in the future,” she says.

"In the near-term there are a couple of factors that could impact stock prices: 1, profit taking at these elevated levels and 2, central bank action as we lead up to Ben Bernanke’s speech at the global central bankers’ conference in Jackson Hole on 31 August," said Brooks.

Other near-term economic indicators could significantly influence the market's direction next week. The economics team at Investec Securities outlines what to expect in Europe, the UK and the US:

“Eurozone Q2 GDP is due on Tuesday. A drop in activity looks to be unavoidable over the quarter and indeed, although Germany might just about squeak through with a small increase in GDP (although we doubt this), falling output looks set to have taken hold virtually across the board

“The data calendar is also busy in the UK ... We are forecasting that Tuesday’s CPI figures will show a small drop in inflation to 2.3% and consider that there is a fair chance that the 2% target could be in sight over the next couple of months. However we are mindful of the impact of the increase in university tuition fees this autumn and the effects on food prices next year from the recent surge in grain costs.

“In the US the main issue is whether the economy will show a pick-up from lacklustre rates of growth. The Empire State and Philly Fed indices provide the first of the more significant survey evidence for August (Wednesday and Thursday, respectively), while markets will be keen to see a monthly increase in retail sales (Tuesday) following three consecutive declines.”

China has also been on the minds of investors these days as new data confirms China's growth is decelerating. While on the one hand, slowing growth in China is detrimental for the global economy, on the other hand, this slower growth could result in market-boosting stimulus measures.

"The week’s real focus was China and the updates on its recently slowing growth," says Mike van Dulken, head of research at Accendo Markets. "We’ve been long concerned that the emerging nation makes a hard landing in terms of economic growth" because of a slowdown in demand from the US and the eurozone nations, he said.

"Recent weak data suggests the landing gear is stuck in fuselage. With this, expectations ha[ve] risen that the People’s Bank of China (PBOC) [will] provide stimulus to encourage a growth revival--[through a possible] interest rate cut, deposit rate cut and/or infrastructure investment--hopefully helping buoy world growth," said van Dulken.

Market Performance (August 6 - 10):
FTSE 100 Index: +1.03%
FTSE 250 Index: +1.50%
FTSE UK All Share Index: +1.10%
FTSE Small-Cap Index: +1.45%
FTSE AIM 100 Index: 2.08%
FTSE Fledgling: 0.76%

See the daily market commentary articles from earlier in the week:
- Monday: Scandal Erupts at Standard Chartered
- Tuesday: Upbeat FTSE Session Marred by Standard Chartered
- Wednesday: FTSE Steady; BoE Cuts Economic Growth Forecast
- Thursday: Standard Chartered Continues Recovery on Flat FTSE

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About Author Alanna Petroff

Alanna Petroff  is a financial journalist with Morningstar UK.