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FTSE 100 near term support trend continues nicely thanks to Central Bank stimulus

Article By: ,  Financial Analyst
October 2, 2012 11:51 AM

The FTSE 100 continued to find support at its near term bullish trend line, helping UK blue chip stocks to find support this week.

On each of the last three occasions we have seen a 3%-4% sell off in the FTSE 100, the Index has found support, no doubt due to the seemingly unlimited supply of liquidity from Central Banks.

In the last few months we have seen the following ‘market supportive’ actions from Central Banks:

  • Federal Reserve                               – announced $40bn in ‘open-ended’ asset purchases
  • European Central Bank                  – ‘Open-ended’ Outright Monetary Transactions
  • Bank of England                                – increased asset purchases to £375bn
  • Reserve Bank of Australia            – Interest rates cut by 25bp to 3.25%
  • Bank of Japan                                    – increases asset purchases target by Y10trillion
  • People’s Bank of China                  – ???

It’s no wonder then that investors are using Central Bank stimulus efforts as an efficient stop loss and continue to buy into market dips. Not only have the markets rallied on expectations of stimulus efforts but the traditional buy the rumour sell the fact scenario has been short lived.

I still maintain that it will be the decision made by the People’s Bank of China that will be the key event to watch for the end of the year. There have been rising expectations that with data still relatively sluggish in China – Chinese CFLP manufacturing PMI remained below 50 expansion line in September – will convince the Chinese authorities to act with vigour. Last week the PBOC strengthened the reference rate by 8 basis points, which is the most since late August, and also moved to inject a record amount of funds into the financial system.

If China don’t act to stimulate or do move but without perhaps the aggressiveness that some investors are looking for, this could disappoint. But until there is clarity on this front, the buy the rumour scenario appears to be sticking true for now and this is helping the FTSE’s near term trend line to maintain.

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