FTSE 100 Aims Best Week in 10 Months

Global Markets React to ECB's Move

We’re seeing big bid for equities again today, building on strong gains in yesterday’s session after the European Central Bank signalled its hiking cycle is over, whilst stronger-than-expected Chinese data overnight has helped secure the upbeat mood. In addition, the PBOC announced a second 25bps cut to its reserve requirement ration for local banks, injecting some further stimulus to the domestic economy. Meanwhile Beijing says it could retaliate against the EU’s EV probe as Europe claims state subsidies are distorting the market…obviously true; China should be kicked out the WTO. In the US the United Auto Workers called the first ever simultaneous strike against Detroit’s Big Three carmakers.

Market Dynamics: Stocks Up, Bonds Down

Stocks are higher, bonds are weaker, with the 10yr Treasury yield jumping 13bps this morning to clear 4.30% again, and 2s at 5.04%. London +0.8% and potentially heading for its best week since November last year (+4.07% to Nov 4th; +3.32% to Jan 6th, currently trades about +3.31% to Sep 15th), Frankfurt +1% and Paris +1.3% early on. New York finished about 1% higher on Thursday, with Tokyo similarly higher overnight. Crude oil keeps extending to the upside with WTI (Oct) futures rising again after clearing $90 in yesterday’s session. Gold is firming up a bit this morning after spiking down yesterday towards the $1,900 mark – a pullback in the dollar overnight offering some reprieve even as we see real rates (10yr TIPS) jumping higher this morning from around 1.93% to 1.97%.

Arm Shares Debut and IPO Market Prospects

A pop for Arm shares on debut in New York has also fuelled buying amid signs of strong appetite among investors for new issuance. Arm shares finished almost 25% - a big win for the broader market even if it’s not ideal for everyone. But ultimately SoftBank still owns 90% and would prefer to under-price and let the stock rally...cornerstone investors played a big part, but retail was showing interest. It’s undoubtedly good news for the IPO market – quite whether there is another Arm out there with such a unique moat is harder to say. 

Analysis of ECB's Recent Moves

The ECB hiked rates by 25bps, but signals it believes the cycle is over: “Based on its current assessment, the Governing Council considers that the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target.” As noted in our flash comments yesterday it was a clear and deliberate signal to the market that the ECB thinks it is done for now. It was a dovish hike, so EURUSD fell, extending losses as US data came in a tad hotter than expected. DB calls it a low conviction pause, but markets are pricing in cuts next year. It’s certainly not declaring victory over inflation but the ECB is saying that the economic growth is going to slacken enough to push down demand and prices…the fly in the ointment: the new paradigm of lumpy inflation, deglobalisation, more expensive and disrupted supply chains and the very real potential for a protracted period of stagflation.

Economic Forecasts and Recent Data Releases

Stagflation? The European Central Bank seems to be in much the same position as the Bank of England – stagflationary signals all over the place. Inflation in 2024 raised to 3.2% from 3.0%, growth outlook revised down significantly to 1.0% from 1.5% in June. For 2025, the ECB sees inflation slowing to 2.1%, below the 2.2% seen in June. Growth outlook steady at 1.5% for 2025. Growth this year revised down to 0.7%. But ECB staff projections are hardly worth the paper they are written on, as they are constantly revised.

China’s economic data mostly beat expectations, with retail sales +4.6% vs f/c 3.0%, industrial production yoy +4.5% vs forecast 3.9%. Fixed asset investment was up 3.2% vs f/c 3.3% dragged down by a steeper drop in real estate investment.

The FTSE 100 rose around 0.9% in early trade on Friday to 7,745, extending the gains from the 2% rally on Thursday, before trimming gains a bit to 7,730. Basic resources had gained over 4.3% for the session with commodity prices firmer, with oil rising to a fresh high this morning. The move sent the FTSE clear of its 200day SMA, and this morning is clear of the July highs to its best level since May. On Monday I’d noted there were signs it would move to 7,700 but it’s blown straight through that level and we might now see it trade in May’s 7,700-7,800 range; Fib resistance seen around where it’s maxing out this morning. RSI looks a bit extended. Be very interesting to see what kind of bid, if any, we get into the today’s close.

Weekly FTSE – encouraging momentum as MACD turns bullish

US data – stronger-than-expected PPI inflation and retail sales put a bit of a rocket under USD and pushed EURUSD even lower in the wake of the ECB call. Empire State manufacturing, industrial production data and the UoM consumer sentiment and inflation expectations are due up later.

Cable – broke below the 200-day SMA yesterday, which is now acting as resistance