Whipsaw action sees US markets in retreat

The FTSE 100 looks set to end a tough week on a downbeat tone, with the US in retreat as well, even as European markets move higher once again.

An NYSE trader
Source: Bloomberg

Natural resource stocks weigh on FTSE

Yesterday’s bounce is a distant memory as the FTSE is dragged down by more mining sector weakness. The China easing story that held up this area yesterday has not lasted a second day, indicating that the story was more hope than expectation.

Yet another dive in crude oil has taken its toll too, leaving the sector out in the cold. Investors in FTSE 100 trackers will continue to curse the fact that they have hitched their wagons to what is essentially a commodity and banking index with some consumer stocks thrown in.

The mid-cap index has been more aligned with Europe today, enjoying a small bounce as some of the quantitative easing liquidity sloshing around Europe finds its way across the Channel.

The divergence in markets is clear to see, as those with the benefit of QE programmes, namely the eurozone and Japan, reach fresh all-time highs, even as the Dow Jones and S&P 500 struggle under the weight of US interest rate expectations.

US markets' rally short-lived  

The rally yesterday on Wall Street is also forgotten, people having been too quick to declare that the dollar theme of this week had faded. Instead it seems the default view has switched back to a belief that ‘patient’ will depart from the Federal Reserve statement next week.

While dip buying is the norm in Europe, Wall Street is back in a ‘sell the rally’ mode, which could easily persist until Wednesday. This whipsaw action seems reminiscent of the pattern seen in January, when US indices failed to find their footing even as Europe took off.

Panic about tightening, it seems, is here to stay, and the flow of money from the US to Europe seems likely to accelerate.

Investors flee commodities as dollar strength persists 

Oil’s dive today reawakens the belief that January’s lows do not mark the full extent of the decline in crude prices, and that February’s bounce was merely an extended bull trap that has conveniently lured in more buyers.

Dollar strength is a feature here too, and with QE in operation in Europe providing the certainty of more equity gains most investors cannot really be blamed for deserting the tricky arena of commodities in favour of simpler investments.

Loose monetary policy set to continue

Sterling and the euro are locked in an ugly contest versus the dollar. The noises from both Mark Carney and Mario Draghi this week have been enough to drive home the message that loose monetary policy is here to stay in the UK and Europe.

Still, there is the potential for short squeezes in both GBP/USD and EUR/USD if the Fed keeps the all-important word in next week – an unwinding of the crowded long dollar trade could see both sterling and the euro receive some much-needed attention.

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