Sluggish FTSE rebound can continue in October

The FTSE 100’s best day in September speaks volumes about its quarter and indeed how it’s fared this year.

Sterling again

London’s equity market benchmark is looking at only its second rise of more than 0.6% this month as it rounds off a sluggish quarter (it’s up only 0.8% since the end of June). And the gauge has lagged large global counterparts all year. As often the case this year, it was a blow to the pound that allowed the top-tier market to shift up a gear on Friday. The latest instance of Britain’s economic flux revealed an unexpected downward revision of quarterly growth, leaving the weakest year-to-year rise since 2013. The effect on sterling, which just days ago raced to its highest prices for the year, was compounded by soft service sector readings and the first fall of Nationwide’s London house price data for 8 years. The pound had already been pressured this week after a rebound in bond yields delivered a strong bounce for the greenback following the Trump administration’s tax cut plans.

Robot appeal

Only the most optimistic would see current conditions as outright bullish for the British index, and it shows. A sterling tailwind can only take the index’s internationally facing behemoths so far, after all. The FTSE has notched a tardy 3.3% rise in the year-to-date. Note that out of 188 trading days so far in 2017, the FTSE has risen more than 0.6% on just 22. Incidentally, it has fallen more than 0.6% on just 22 days too. Is this odd symmetry another sign of the role of algos? Robots may be more likely to maintain interest than humans in such moribund moves. Either way, it’s clear that aside from heavyweight stock influence—which will be thin on the ground before the next reporting season—the benchmark is currently at the whim of the pound. As ever, sterling is the great leveller for the FTSE’s supposedly economically-uncoupled UK blue chips.

A break for BoE

Luckily for them, the month ahead is bereft of a Bank of England meeting, at which rate setters might well have tacked on further hawkish pressure, as per this month. Instead there are quite a few international economic releases and events due that could drive home the perception of the UK’s uncertain economic state and weigh on the pound further. Preeminent among these could be next Friday’s update of a U.S. labour market at full employment, which might underpin the dollar. Earlier that week, a raft of PMI, jobs and business inflation data from an ebullient Eurozone could have the same effect on the euro. Sterling will be back in focus in the week after when British wages and inflation data will be on tap, together with potentially contrasting U.S. headline CPI. There’s also a European Council meeting later in the month, at which painful progress in talks before Brexit talks can begin will no doubt be spotlighted again.

Chart ‘action’

From the point of view of a potentially deeper relapse by the pound, the FTSE has scope to inch higher month. Technically speaking, this would enable it to re-join the most recent phase of its rising trend, which we plot back to late-June/July 2016, since the index has validated lines drawn from then before a breakdown in the middle of this month. The FTSE was prodding the uptrend from its underside on Friday. Should it break back above in the short term, uplift in momentum can be expected to bring some follow-through of recent gains. Traders will watch oscillators like the slow stochastics, as they’re starting to suggest overbought conditions. If gains peter out soon, the market could certainly trend back to confirmed support touched on 15^th September. That coincided with a 76.8% retracement notch of the April-June rise. Below that, we think the market would even look toward year lows recorded in February, which the index largely revisited in April, when it bounced at 7096.8.