FTSE recovers from early falls after ISM data beats forecasts

The FTSE 100 recovered from early losses to rally around 1% in afternoon trade, with stocks boosted by a slower than expected fall in US ISM manufacturing data. However, the ISM induced gains quickly reversed with the FTSE 100 retracing from resistance levels of 5445-5450 to trade near flat on the day.

US ISM manufacturing data slowed less than expected in August to 50.6, signalling continued growth when a fall to 48.5 was expected, which would signal a contraction. However, giving a bit of a warning sign was a surprising fall of 1.3% in construction spending in July, which had been expected to remain flat at 0.2%. Proving some relief to the fall however was the fact that June’s construction spending increase of just 0.2% was revised higher to 1.6%. This helped to counter the sentiment around July’s sharp fall. That said, considering the turbulence of the markets in August, when consumer confidence took a beating, Augusts’ reading of construction spending could also be volatile.

The fact that the stock market rally, triggered from the better than expected ISM data, was short lived is absolutely no surprise at all. We have the UK index close to strong resistance levels, whilst many of the buys we have seen this week have been on the back of weaker data, with poor data being cited as applying more pressure on the Fed to begin a third phase of QE. Sure enough the stock market rally from today’s better than expected ISM manufacturing data was short lived as with investors quickly digesting the fact that whilst stronger data helps to calm fears of a double dip, it also calms pressure on the Fed to act.

Banking reform delay supports Barclays, RBS and Lloyds
Banking strength maintained into the afternoon session, with stocks such as Barclays, RBS and Lloyds boosted by investor optimism on the back of a speculation that any restructuring of the large UK banks may have to be delayed until after the next general election in 2015. Barclays, RBS and Lloyds all saw gains of 5%-8% holding firm throughout the day.

All eyes now turn to Non-Farm Payrolls 
All eyes now turn to non-farm payrolls due out on Friday at 1.30pm (UK time). Data is expected to show that non farm payrolls rose by 75,000 in August, less than July’s 117,000, with the US unemployment rate holding steady at 9.1%.

We may get a somewhat indifferent reaction depending on which way the payroll data comes in. A worse than expected reading, whilst posing yet more woes for the US economy could apply pressure on the Fed to act with more stimulus in the form of quantitative easing and this could temper any instant bearish market reaction. Yet a stronger reading paints a brighter picture of the US economy than some of the recent data has suggested but at the same time eases Fed pressure to announce QE3. Either way, there is likely to be huge interest surrounding the number and we could see a somewhat volatile market reaction as a result.