Commodities reliance makes FTSE rally unstable

The mining stocks spike higher, giving the FTSE 100 its biggest six-day rally since 2011.

Miners at work
Source: Bloomberg

Mining stocks have continued to drag the FTSE higher, recovering not only their own losses but in turn helping the main UK index to the biggest six-day rise since August 2011. There is no doubt the commodity space is inextricably linked with this recent recovery and today's jumps in Anglo American (12%), Rio Tinto (8%), BHP Billiton (6%), and Glencore (10%) show exactly why we are seeing the index outperform to such a degree. However, while the recent rise in the price of oil has led mining firms higher, it is clear that oil price volatility could easily see everything crash lower once more like a house of cards.

This afternoon saw oil inventories rise by 3.1 million barrels, taking some of the wind out the sails of this recent rally. The continued build-up of US crude inventories undermines the idea that US producers are finally feeling the pinch and cutting back on production. Oil is and will remain in strong supply going forward. The question is whether demand will pick up at these lower prices.

The EIA today announced expectations that 2016 will see oil demand rise by the most in six years. However, perhaps the most telling announcement from the EIA today was that the past four weeks saw lower demand than this time last year when oil prices were $40 higher that today. There is a feeling that  despite a possible spike in oil prices, the long term cold see them move lower yet.

Tomorrow sees China come back from their Golden Week holiday period, which sees Chinese markets cease trading. The return of volatile Chinese markets has the potential to throw a spanner into the works of this recent rally and given the release of the latest BoE monetary policy decision, coupled with both BoE and FOMC minutes, we are expecting a highly volatile day tomorrow. As European markets wake up to Chinese headlines, which are speculated to possibly include a further stimulus package, it is hard to believe their market will not have an effect on those closer to home.

Today's offer from AB InBev for rival SABMiller was rejected swiftly despite an offer some 15% higher than current value. The timing of the recent takeover offers are certainly telling given that the shares have pulled back along with the wider market, falling 22% in July to August alone. There are certainly benefits to the deal, given that the two firms tends to target two very different market. However, the deal has to make sense for SABMiller shareholders, who it appears are willing to wait it out for another offer to arrive, and I’m sure one will.

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