Data and Drivers Aplenty For Continued Market Swings

FRIDAY MARKET UPDATE: This was a week of excessive political and economic news and moves, and there's little respite on the horizon for stock markets

Michael van Dulken 9 November, 2012 | 5:56PM

This article is part of Morningstar's 'Perspectives' series, featuring contributions from third parties including asset managers, academics and investment industry thought leaders.

The Democrats may have been able to celebrate President Obama keeping the Oval office but the markets haven't. A significant sell-off has materialised since the re-election on the realisation that the world is pretty much the same place it was with the looming US fiscal cliff ($600 billion reversal of tax cuts and government spending, akin to imposing austerity) remaining the biggest risk to US growth and its possible highway back to recession. Imagine the knock-on effects elsewhere in the world, both sentiment and trade-wise. 

Add to this a gloomier outlook from the European Central Bank's (ECB) President Draghi on eurozone growth and a raft of depressing industrial, manufacturing and services data from the region (Ouch! That pretty much covers everything, doesn’t it?), and the prospect of Greece and Spain making us wait even longer for them to receive bailout money and make a bailout request respectively, and we have the ingredients for the correction in which we find ourselves. We've been highlighting this possibility for several say "broken record", I say "consistent message". 

UK data also saw NIESR GDP estimates fall back, which dented sentiment. Worse still was the Bank of England (BoE) holding fire on more quantitative easing (QE). Normally this would be because previous bouts have worked, reducing borrowing costs and providing the growth desired. However, with growth still in the doldrums it is more likely that the halt is more a function of the bank having become less convinced of the effectiveness of its asset purchases. With the ECB maintaining its 'ready to help' stance for troubled country’s borrowing costs, but refusing to provide more details, central banks just served to disappoint this week. 

Not all news was gloomy, however. US election change risk has passed. Governor Romney may have been billed as business-positive but change involves risk of the unknown and election pledges are not always followed through--sometimes for the better. China, the nation we have all been worrying about until recently, has maintained a good stream of macro data (industrial, manufacturing, investment, services, retail), suggesting growth recovery. Slowing inflation also implies more wiggle-room for policy easing, allowing the fires of recovery to be stoked further. Risks still exist amid the country's transition of power but the prospect of it avoiding a hard-landing in terms of growth slowdown has served to maintain some positivity on the region. 

With the FTSE 100 index having fallen 215 points from peak-to-trough (3.6% fall), finally falling below multi-month rising support and testing prior lows, we are sat on the possibility that the correction persists back to the September lows of 5,630, maybe even back to 3.5yr rising support at 5,600. We are however conscious of this afternoon's recovery, helped by more positive US consumer confidence data. (Is the nation and its consumers dislocating from the rest of the world?) Could lows of today and this week become support for some range trading until Christmas? Whatever happens, we know that drivers and data are aplenty for continued swings, which is perfect for short-term traders. 

Note the data over the weekend which could dictate sentiment come Monday morning. Could Chinese Trade Balance and export data provide more support for belief in recovery? Will Japanese GDP data be worse than expected, reigniting growth worries in Asia, after its own central bank (BoJ) recently downgraded forecasts? Whatever happens, it is likely that the high-beta stocks (those that move more than the wider market, by virtue of their exposure to growth and often have a bigger weighting in the index) could move the most. Keep an eye on those financials and resources-focused stocks. If they don’t move on Monday they may do following data next week, including the Eurogroup & Ecofin meetings (Monday and Tuesday), ZEW Surveys (Tuesday) US Retail Sales (Wednesday) and Eurozone GDP (Thursday). 

As always, enjoy your weekend.

Michael van Dulken is head of research at Accendo Markets.

The views contained herein are those of the author(s) and not necessarily those of Morningstar.


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About Author

Michael van Dulken  is head of research at Accendo Markets, an online trading services provider offering CFDs, spread betting and forex to retail (private) clients.