Traders tread lightly as turnaround begins

In mid-morning trading the FTSE 100 is back in the black as market confidence returns. 

City of London aerial view
Source: Bloomberg

The Chinese stock market may be caught up in its own chaos, but the rest of the global equity markets are recovering. Traders who are brave enough are picking up cheap stocks, but they’re still fearful we could be in for another sharp decline. For now the financial instability seems to be contained in China, but that may not last and traders who are buying are keeping an eye on the eject button.

While the moves we’ve experienced this morning in Europe are encouraging, the market still has a lot of ground to make up before we’re back to normal levels. In these situations, dealers are very fearful of a false dawn, and unless the market moves above certain technical levels we could be heading for another move lower. Too many traders have been traumatised by yesterday’s collapse, and are waiting it out on the sidelines.

Shares in BHP Billiton have bounced today despite disappointing full-year figures. The onslaught that the entire mining sector has suffered recently has enticed some buying, but the move is more of a reaction to Monday’s collapse in prices. Shares in the world’s biggest miner are back above the £10 mark, but as the biggest importer of minerals undergoes a dramatic slowdown in growth, the stock price will head lower again.

Shares in Petrofac are pushing higher today after being severely punished yesterday, and I suspect the positive move will be short-lived due to the collapse in the underlying oil market. This year has already seen severe cuts to capital expenditure budgets of major oil and gas companies, and additional cuts will impact Petrofac’s profitability next year.

We are expecting the Dow Jones to open 330 points higher, at 16,200, as the bounce back gets underway. Dennis Lockhart reiterated his point that the Federal Reserve should increase interest rates this year, but fewer and fewer traders feel that a rate hike will happen next month. If China’s financial markets remain uncertain, Mr Lockhart may not get his way and we could be looking at a rate rise in 2016. 

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