Yesterday saw a paroxysm of selling, as the febrile summer atmosphere, a lack of volume and concerns about US Federal Reserve tapering caused investors to abandon the market in droves. US markets have lost around 3% of late, but given the summer run-up we had in July this is still in healthy ‘profit taking’ mode rather than the start of a full-blown correction. The odd thing is that all this has transpired while the data flow gets better and better. We have seen a ‘good news is bad news’ routine appear before, but talk of tapering means that it is likely to be the prevailing view for a longer period this time around.
Confronted by a lack of corporate news and a dearth of economic data, the FTSE 100’s response has been to sit tight and await developments. Yesterday’s swan dive lower means that the market is in no mood to rally for the moment and with two weeks of August left it is hard to see how the index will muster the strength for another charge back to 6600. The mining sector is doing its level best to keep the market from slipping further, with precious metals firms like Fresnillo and Randgold Resources bolstered by yesterday’s surge in gold and silver. Meanwhile, housebuilders are doing their best to rebuild, but any extension of the current rally in the sector will take time to materialise as investors worry about an earlier tightening in Bank of England policy.
Investors reviewed the good US data yesterday and decided that it presaged Fed tapering in September, so it will be interesting to see if today’s numbers, including housing starts, building permits and the Michigan confidence index, are treated in a similar vein. Ahead of the open, we expect the Dow Jones to start ten points lower at 15,104.