The FTSE 100 rallied 2% higher this morning, as a rebound in Asian equities enticed investors back to the market in search of value.
By around 11:00am (London time) the FTSE 100 Index was 96.38 points (+2%) higher at 4920.03, led by strength in resource shares and banks. At the same time the broader FTSE 250 Index was 167.14 (+1.8%) above its previous close at 9468.49.
The mining sector saw sharp gains this morning, with Kazakhmys, Rio Tinto, Xstrata, and Antofagasta all up by 5% to 6%. Energy companies were also en vogue, especially BP, which jumped 3.5% to 344.9p following an upgrade from RBS today.
A senior UAE source informed Reuters that BP is seeking support from sovereign wealth funds in the Middle East and Asia to defend itself from any takeover bids. ‘BP is seeking a strategic partner so it doesn't get taken over by other major oil companies such as Exxon and Total,’ the source said. ‘It's BP that is approaching the sovereign wealth funds not the other way round. They are the ones in need of a partner.’ Separately, Bloomberg News reported that Libya’s top oil official Shokri Ghanem said BP is a ‘good buy’ after falling by half because of the Gulf of Mexico oil spill.
Sector peer Cairn Energy rose 3.15% to 429.5p while Tullow Oil climbed 3.4% to 1076p after announcing that it has had a ‘very good’ first half.
Banks rebounded sharply as well, with Barclays and Royal Bank of Scotland, yesterday’s worst performers, rallying over 5.5% to 273.5p and 3.7% to 40.40p respectively. Lloyds Banking Group advanced 3.3% to 56.55p, while Standard Chartered added 3% to 1657.5p.
Stock market valuations are appearing fundamentally attractive and from a technical analysis perspective, the RSI was showing the FTSE trading at ‘oversold’ levels recently, so its not really that surprising to see a rally of this magnitude. I am nevertheless still cautious about whether the rally we’re seeing today will last. Some may argue that the market has priced in a slowdown in global economic fundamentals the second half but there fact remains that it is still too premature to be certain.
The Financial Times today reported that China Investment Corp (CIC), the country’s sovereign wealth fund, may sell its holdings in domestic banks in order to widen the type of investments it can make overseas. CIC is said to have $70 billion in bank stakes when it was launched in 2007.
But in the greater scheme of things, CIC appears to be cashing out of the Chinese banking sector at the right time. Harvard university professor Kenneth Rogoff, formerly a chief economist at the IMF, has warned that China’s property market is beginning to ‘collapse’ and that it will hit the nation’s banking system.
Around a week ago, Moody’s Investors Service warned that Chinese banks will experience a rise in bad loan ratios over the next couple of years but said they do not believe that Chinese banks would encounter a crisis similar to that seen on Wall Street in 2008. ‘As long as the Chinese economy maintains its fast growth, we think the performance of major Chinese banks will not be too bad,’ said Yvonne Zhang, a China banking analyst at Moody's.
Elsewhere, the Society of Motor Manufacturers and Traders (SMMT) today said that new car registrations in Britain rose 10.8% in June, despite the end of the scrappage scheme. ‘The new car market continued to perform above expectations in June, with fleet sector registrations up 25% compared to this time last year,’ said Paul Everitt, SMMT chief executive. ‘The industry still expects challenging economic conditions in the second half of the year and government action to improve access to credit for consumers and businesses will be important in sustaining the momentum of recovery.’
Meanwhile, a separate report from the British Chambers of Commerce (BCC) showed that Britain's manufacturing and service sectors continued to recover in the second quarter, but warned that activity is poised to slowdown in the second half. ‘With very austere times ahead, no one should kid themselves into thinking that the UK’s economic recovery is totally secure,’ said David Kern, a chief economist at the BCC. ‘Many of the factors driving growth this year, mainly stock building and the continued effects of the policy stimulus, are only temporary. As a result, the threats of a relapse remain serious.’
Looking ahead, Wall Street resumes trading today following Independence Day holiday on Monday. September futures for the Dow Jones Industrial Average and S&P 500 were up by around 0.80% and 0.86% respectively by 11:00am (London time), suggesting that US equity markets may mirror gains in Europe.
The US ISM non-manufacturing report, due for release at 3pm (London time), will provide further insight into the state of the US economic recovery. According to Bloomberg’s median forecasts, the ISM reading will fall to 55 in June from 55.4 the prior month, suggesting the expansion in the US services industry slowed down last month. Readings above 50 signal an expansion.
