FTSE sells off tracking US losses as investors fear a market correction

The FTSE 100 closed heavily lower by 1.4% on Wednesday trading with European stocks tracking losses is the US last night where the Dow Jones fell over 100pts from the US Index’s daily high as technical resistance levels took hold on near term sentiment.

The FTSE 100 was closed lower by 83 points, marking a fall of 1.4% and seeing the UK Index trade below support levels of 5800 for the first time in two weeks. Similar falls were seen in broader European trade with the DAX losing 1% and the CAC trading lower by 1.47%.

(see FTSE 100 chart below)

The S&P 500 retraced from a four year high in trading last night to close back below the 1415 level. With the US markets also trading lower yet again today by 0.5%, a close below the 1400 and 1390 level for the S&P 500 in the near term could be a signal that US stocks may see a correction and this could follow through to European trading. The Dow Jones also reversed from technical levels last night having hit resistance. The Dow hit a new three month high of 13,330, falling just short of the 1 May 2012 high of 13,338. With there being no coincidences in the market, this sell off is an important element that needs to be watched by investors, particularly if any selling wave starts to gather momentum.

Of course, a correction of 5% is nothing to fear for investors. The Dow Jones, S+P 500 and FTSE 100 have all rallied over 10% from the lows reached in early June and whilst this is positive, markets rarely move in one smooth direction. A correction of 5% could help to set up a platform for European and US stocks to rally into the year end.

That said, there are some very important variable to consider. We have the Jackson Hole Economic Symposium to come at the end of this month, where central bankers meet and the market will be very keen to hear of stimulus plans to help curtail the weak contraction in growth. Moreover, we also have the Volatility Index – a key gauge of market fear or pessimism – at major support lines. A rally in the VIX is normally a bearish indicator for stocks as investors start to avoid risky asset classes. As such, these elements are expected to play a role in the near to medium term outlook for stocks.

BHP Billiton shares fell over 1.5% in trading after the miner reported a 35% fall in profits for the half year to $7.16bn. Investors had expected a heavier fall in earnings to $7bn and so the result was in fact better than expected. However, a smaller than expected hike in final dividends to 57 cents a share, alongside plans to preserve cash, impairment hits taken for previous investments and delays to major projects all left the investor reaction to the update somewhat neutral. With the FTSE 350 mining sector falling 2% this morning as investors sell out of positions following the sharp reversal in US trading overnight, BHP Billiton’s shares have tracked the broader mining sector this morning.

The Financial Times reported this morning that UK bank Royal Bank of Scotland is under investigation by the US authorities by being involved in financial transactions with countries subject to US sanctions such as Iran. The news comes hot on the heels of a deal made between US authorities and Standard Chartered for a similar allegation, whilst German bank Commerzbank is also under investigation. We have not seen any significantly bearish reaction in the markets to the report in the FT, but RBS has been fairly transparent in the past regarding negotiations with authorities over compliance matters such as these, as long as you can read the small print in earnings updates.