FTSE almost 12% off May high

An initial bounce off last Friday’s low has been a short-lived affair and the FTSE is now 50 points lower at 6066, threatening to completely undo the rally from January to date. The decline off the highs seen on 22 May is now almost 12%.

The Shanghai sell-off and the decline in the commodity suite owing to a stronger dollar has resulted in a palpable investor reticence to indulge in risk assets in European trade today. Chinese stocks have entered bear market territory despite the intervention from the People's Bank of China to assuage the continued liquidity crunch amid renewed concerns about banking sector stability. With the US ten-year yield rising to a high last seen in August 2011, investors are clearly still confused and uncertain over the Federal Reserve’s tapering policies.

With the German IFO index rising to 105.9 from 105.7 in May, even increased business confidence in Germany has failed to stem the abatement. Despite Italy being mired in recession and with youth employment above 40%, consumer confidence there also rose, helped by prime minister Enrico Letta’s plans to cut tax and boost the jobs sector.

The FTSE 100's basic resource sector is effectively getting a hammering, with the likes of Evraz and Vedanta Resources contracting by 5.49% and 4.65% respectively. Defensive stocks are seeing an increased interest with marginal gains witnessed on United Utilities and Severn Trent. Vodafone, another FTSE riser, has confirmed that it will buy Kabel Deutchland for €7.7 billion. Given that the UK-based mobile operator had considered the acquisition in advance of the German firm’s IPO in March 2010, there is a feeling that they may have overpaid at this juncture.

Economic data is on the light side today, and we expecting the Dow Jones to open down 110 points at 14,690.

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