FTSE 100 Recent Market Calm Poised to Break with a Storm?

on Aug 27, 2012

While last year it fell more than 1,000 points over the four-week period between July and August, this year the FTSE 100 has risen 205 points since the start of July. The summer boost, caused by pledges of support for the euro, has been characterised by low trading volumes and overall tranquillity. But the recent market calm appears to be coming to an end as last week the benchmark index suffered its first weekly drop since the end of July, dropping to 5,776.6 points.

Analysts explain the recent trends as a result of Europe’s debt crisis having gone quiet for a couple of months over the summer. Investors were also hopefully looking for signs of further monetary stimulus from the United States and China which could potentially lift the global economy.
However, a number of storm clouds are brewing on the horizon. With the normal rhythm re-establishing itself as summer draws to an end investors are again noticing that nothing much has really changed in Europe.

Listed mining companies also have a relatively heavy weighting within the FTSE 100. Hurt by weaker demand from China, the world’s biggest metals market, miners are dropping significantly, bringing down the whole index. So far this year, Anglo American (LON:AAL) has lost 20.8 per cent to £18.85, Kazakhmys (LON:KAZ) has shed 28.8 per cent to 660.5 pence and Evraz (LON:EVR) has slid 34.1 per cent to 246.8 pence. The heaviest blue-chip faller is Eurasian Natural Resources Corporation (LON:ENRC), with a loss of 46.7 per cent to 228.9 pence. With recent reports on dropping Chinese demand for industrial metals such as iron and copper further slides would not be unexpected and a blow to the index.

!m[](/uploads/story/314/thumbs/pic1_inline.png)Meanwhile, Britain’s banks have performed relatively well this year with the stream of scandals involving mis-selling, Libor and money-laundering not yet having had a major impact. Already fined for its alleged dealing with transfers connected to Iran, Standard Chartered (LON:STAN) has remained steady, dropping when the news broke and recovering when the situation was dealt with quickly and not too catastrophically. Overall it is up 0.3 per cent to £14.13. Some banks, however, have performed better.

Despite losing its chief executive and chairman in the Libor furore, Barclays (LON:BARC) has gained 6.3 per cent to 187.2 pence. Royal Bank of Scotland (LON:RBS) has also been up 10.5 per cent to 222.9 pence, while HSBC (LON:HSBA) has added 13.4 per cent to 557 pence. Lloyds Banking Group (LON:LLOY) has risen the most, up 31.2 per cent to 33.98 pence.

Some FTSE 100-listed companies were given a lift by takeovers and other deals that have recently been concluded. In July, advertising group Aegis (LON:AGS) was acquired by Japan’s Dentsu (TYO:4324), which helped the shares rise 64.5 per cent to 237.5 pence. Meanwhile, CSR (LON:CSR) has gained 80.8 per cent to 331.8 pence, boosted by a deal to sell its handset operations to Samsung. On the other side of the coin, Glencore (LON:GLEN) has lost 6.4 per cent, down to 366.85 pence as a consequence of resistance to its potential takeover of Xstarta (LON:XTA), which is also down 5.1 per cent to 927.7 pence.
Energy companies have been showing mixed results. On the mid-cap index, explorer Ophir Energy (LON:OPHR) has gained 89.2 per cent to 546.5 pence, and according to analysts, the stock may be sent higher by further positive news on its operations in Gabon and Tanzania. At the same time, falling energy prices have sent Royal Dutch Shell’s (LON:RDSA) B shares down 5.9 per cent to £23.09. BP (LON:BP) has also lost 3.5 per cent to 444.55 pence, hit by asset write-downs.
On the other hand, FTSE 100-listed insurers have generally been resilient. Boosted by sales of fee-based products in the UK, Standard Life (LON:SL) has gained 29 per cent to 266.1 pence and Legal & General (LON:LGEN) has added 27 per cent to 130.6 pence. Old Mutual (LON:OML) has also risen 23.6 per cent to 168.2 pence, on the back of growth in South Africa. Meanwhile, Asian exposure helped Prudential (LON:PRU) to add 23.3 per cent to 787 pence. Yet the biggest FTSE 100 riser was Hargreaves Lansdown (LON:HL), gaining 43.9 per cent to 619.5 pence.
As the holiday season comes to an end, investors and dealers will eventually pick up the pace of their market activity, which should increase trading volumes. And while most traders hope for further central bank stimulus, Mr Williams at broking and advisory house Peel Hunt sounded a note of caution on the consequences. “The fact is that risk assets are still very responsive to the prospect of more stimulus,” he said for The Telegraph. “It’s highly questionable, from a long-term perspective, whether you can keep relying on central banks pumping liquidity in to the extent they have done over the past three or four years,” Mr Williams added.
If a fresh round of QE does not seem to be in the offing from the US and China, industrial commodities continue to suffer and the Eurozone crises kicks off again, the relatively positive summer may end in autumn storms for the FTSE 100.


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