Equity market movers of the day

It was generally a weak day for equities, with most US and European indices coming under pressure, although losses were fairly moderate and most were less than 0.5%. Key themes that are dominating the equity markets right now include: volatility in IAG, the flattening of the US yield curve, which is weighing on the banking sector, and the UK election.

Below we take a look at the FTSE 100 and Dow Jones Industrial Average, to see what was moving and why, and what it can tell us about potential moves later this week.

FTSE 100:

This index fell 0.3% on Tuesday, led by consumer staples and the telecommunications sectors. The only two sectors that had a positive performance were real estate and consumer discretionary. Real estate may have befitted from an upsurge in the polls for the Conservative Party, which suggests that it will win a majority at the election on June 8^th. Some argue that this could boost the chances of a Brexit deal, which could help the struggling high end London property market.

The top performer on the FTSE 100 was 3i, yet again; this stock is having a good run and is at its highest level in a year. However, it is starting to look a tad overbought, and its RSI is above 70, thus we could see some profit taking in the coming weeks.

Other positive movers including travel firm TUI and GlaxoSmithKline. In contrast, the biotech sector was under pressure, with Mediclinic international and Shire the two worst performing companies on the FTSE 100 on Tuesday. The latter stock was cut to market perform from buy by some investment bank analysts, which soured the mood for the entire sector.

IAG, the parent company of British Airways also dominated headlines on Tuesday. After falling 4% at the open after the weekend of chaos at BA, it staged an impressive recovery and managed to move back above the key 600 level, and close at a highly respectable 605. The next big level on the upside is last week’s high at 615.

Overall, the FTSE 100 remains a mere 30 pips away from a record high. This index may continue to grind higher and we could see this index rally into the UK general election in 9 days’ time. The biggest risk to UK stocks now seems to be a win for Labour, due to their tax plans, however, the market does not deem that a possibility and are brushing off the threat even with the recent narrowing of the polls.

The Dow:

It was a similar day the other side of the Atlantic with US stocks slipping back from record highs. Although this is the first day back after the Memorial holiday, today’s slip doesn’t prove that “sell in May and go away” is in full force yet, after all this index is still only 130 pips away from a record high.

The index was dragged lower by energy and financials. The energy sector was hit by weakness in the price of oil after last week’s Opec meeting, while financials have been scuppered by the flattening of the US yield curve, as doubts creep in about the prospect of further Fed rate hikes later this year after the expected hike in June. The biggest decliners in this index on Tuesday were Goldman Sachs and JP Morgan, and there could be further declines for the banks in the coming days. In contrast, Verizon and 3M, two telecoms companies, were the top performers.

Overall, we think that the US indices could be in a holding pattern while we wait for some key US economic data later this week, including ISM reports and the US payrolls report for May due on Friday. This could give the market a sense of the US economy’s strength mid-way through Q2, which may provide a steer on Fed policy decisions later this year. A strong batch of data could be positive for the US banks.

Interestingly, the Dow’s lead indicator, the Dow Jones Transports index, has been showing signs of strength of late and is currently testing some key moving average resistance. Traditionally, a strong transports index can bode well for the overall index, thus we wouldn’t write off the prospect of further gains for the Dow in the short term.