FTSE rallies yet doubts remain

Despite the bounce in the FTSE, a bearish sentiment remains, and talks of an Ocado/Amazon merger drag the top four supermarkets lower.

London Stock Exchange
Source: Bloomberg

This morning’s bounce in European indices has caught many off guard given the raft of weak economic data out of China, pointing towards continued weakness within the Asian powerhouse. While this provides a backdrop for further stimulus out of the PBoC, the markets are growing increasingly sceptical about any such move, given the relatively ineffective actions taken by the Chinese regulators and central bankers in the past.

From a purely technical standpoint, yesterday saw the FTSE tread water at the 5768 August low, which marks somewhat of a watershed level. Beyond this, we could easily see another 3% shaved off the index immediately after a break of this level. However, amid a backdrop of falling equities globally, there is little confidence in this rally, which is already showing signs of weakness, just a few hours into trading.

UK inflation took a tentative step away from the brink as headline CPI rose 0.2% year-on-year, up from 0.1% in November. Yesterday’s speech from the new BoE member Gertjan Vlieghe highlighted the need for patience amid this low inflation and slowing growth environment. However, with the futures markets now speculating a rate cut is more likely than a hike, rate hike expectations fade by the day. With core inflation rising to 1.2%, it is clear energy prices are the thorn in the foot of the UK inflation picture and as long as crude price tumble, a rate hike remains some way off.

Rumours of a tie-up between Ocado and Amazon are sending shockwaves throughout the supermarket sector as an already highly competitive sector looks to become even more difficult to operate within. The two pronged attack on the big four, with low-cost German entrants (Lidl and Aldi) on one side, and one of the world’s biggest retailers on the other, will no doubt shrink the perceived market share of the likes of Tesco and Sainsbury’s.

Ahead of the open we expect the Dow Jones to start 224 points higher, at 16,212.

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