FTSE s no vote relief rally weakens

A rally in UK stocks following news that Scotland voted ‘No’ in Thursday’s independence referendum has eased off somewhat, with the market apparently unwilling to push major shares too close to multi-year highs.

The UK’s benchmark FTSE 100 index traded as high as 6872.82 this morning, an 0.8% gain, which in itself was quite modest.

However the index is now trading about 0.7% higher having eased its gain on the day to as little as 0.5% a while ago.

Financial stocks are by far and away the sector making the most gains.

Shares of Lloyds Banking Group, and Royal Bank of Scotland, two of Britain’s largest banks with strong historical and continuing links to Scotland, traded around 2% and 3% firmer respectively.

Their managements had come out strongly in support of the ‘No’ vote in recent weeks.

They were particularly concerned about the risk of disruption to the UK’s financial system from a vote in favour of Scottish independence bearing in mind separatist leaders’ demands for currency union using the pound, whilst English politicians were emphatically against one.

Shares of Scotland-focused firms which have interests in North Sea oil also traded firmly.

Glasgow-based oil and gas services firm Weir Group traded as high as 1.9% up, whilst the stocks of North Sea rig operators Petrofac and Enquest gained 3.3% and 2.7% respectively.

Still, even as investors expressed their relief in the outcome of the vote in Scotland, they’re very likely to be aware of additional issues that call for a curb of excessive enthusiasm in the near-to-medium term.

Market eyes Alibaba IPO amid rate-hike worries and multi-year highs

For one thing, the much-anticipated $21.8bn initial public offering of China’s e-Commerce behemoth, Alibaba Group Holding Ltd. looms in Europe’s afternoon trading session.

Ahead of major IPOs, it’s common for markets to display visible activity reflecting re-allocation of capital; suggestive investors are withdrawing cash in readiness for the share sale.

There may be an element of that this morning, serving as a cap on London’s relief rally.

Additionally, with the FTSE 100 having traded earlier this month higher than its range today, the market can be said to be reflecting the fact that a vote against independence was already ‘priced-in’ to the value of the benchmark index’s constituent stocks.

The FTSE 100 reached a multi-year high of 6904.86 on Thursday 4th September, well above its best levels so far today around 6874.

Like stock markets in other leading economies, the UK market has been boosted in recent years by long-standing policies by its central bank, the Bank of England, to pump a flood of cheap cash into the financial system by means of huge sovereign bond purchases.

However, BOE governor Mark Carney and other members of the bank’s Monetary Policy Committee have made it clear the easy-money era is all but over and will, depending on key economic factors like labour market growth and inflation, begin to wind down monetary stimulus sometime in 2015.

In response to a major policy shift from the BOE, the UK’s stock market will probably experience a correction from its current historically strong levels. Today’s conspicuously moderate relief rally suggests investors are bearing the enhanced risk of a medium-term correction in mind.

Monthly chart suggests caution

A FTSE 100 chart using monthly intervals is below. The relative drop-off in participation (volume) is clear in the most recent period. Additionally, the Moving Average Convergence Divergence (MACD) signal line has edged under the MACD line, putting the market on notice for a potential ease off, albeit this is not a very emphatic indication.

The second chart compares trading over 30-minute intervals.

As we can see, on a shorter-term basis, the FTSE 100 index suggests more freedom within certain near-term parameters. A return to the recent historical high above 6904 does not seem likely today.

Even so, the market currently looks underpinned and a return to the day’s low around 6819 seems equally unlikely for the moment.