Similarities, Gold, Risk & Reward - Accendo Markets Weekly Roundup - 16 Aug 2013

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Mike van Dulken, Head of Research at Accendo Markets, commented in his Weekly Roundup to clients;


Another FTSE 100 correction week, this time taking us lower than the last to retest summer lows, but also much quicker than last time. Was that it, and is the only way is back up towards summer highs? Or is the sideways activity of the last 24 hours merely a pause with more downside to come? While the week started positively on optimism over global growth following Chinese figures last week, improving US data, UK growth accelerating and Europe exiting recession, stimulus fears and the impact of its withdrawal on growth and addicted markets have dominated.

While short-term graphs show momentum returning positive and the correction from a bearish wedge (5-15 Aug) looks to have delivered the minimum fall expected, it could always deliver more and the pause could simply be ‘half-time’ for markets to regroup. The Bulls hope weakness will be limited by a combination of 200-day MA at 6395, the 6400 level (1.3% downside) which has been intersecting support and resistance since April, a trendline of falling lows from 18 Jul around 6440 and upside unhindered before the 6630 level from whence we fell so quickly.

Markets dropped on worries over the future of loose monetary policy with the Fed potentially taking its foot off the stimulus pedal in September, markets pricing in an earlier rise for UK interest rates than the BoE’s own forecast and worries over the effectiveness of intervention in Japan. Improved US/UK data making life harder for those hoping QE/low rates stays round for longer and even Europe out of recession hasn’t provided much support. Add to this renewed unrest in the Middle East and we have the ingredients to see markets react, maybe overreact on account of it being mid-summer when volumes thin out to Christmas-like levels. Then again, this means potential for any move higher to also be sharp.

Big movers on the FTSE 100 this week include the Fresnillo (FRES, +14.0%) and Randgold Resources (RRS, +9.1%) which both benefited from a weaker USD versus peers which helped the price of Gold rally beyond the recent $1350 level, keep its recovery from June 3yr lows alive. Glencore (GLEN +3.1%) rose on a boost in copper production and, along with peers, the news that China has seen a surge in demand for the red metal, countering some of the recent concerns over slowing growth and giving a boost to the sector despite the general market weakness.

Among those that suffered, easyJet (EZJ, -8.9%) maintained its correction from all-time highs, falling below its trendline of 8-month rising support as investors took profits following the 386% rally from September 2011 lows. Unrest in Egypt also added to travel concerns hitting names such as Thomas Cook (TCG, -9.6%)and Tui Travel (TT., -4.8%) while British Airways owner IAG (IAG, -5.7%) was hampered by transatlantic partner American Airlines encountering an M&A hurdle. Elsewhere major pain was had by house builders such as Persimmon (PSN -4.5%) and peers Barratt Developments (BDEV, -7.4%), Ashtead (AHT, -5.9%), Taylor Wimpey (TW, -4.7%) and sector-exposed Travis Perkins (TPK, -5.0%) which were down on concerns that an early UK rate rise would dent the UK housing market along with government initiatives opening to older houses next year likely hurting the new-build sector.

While the pessimist in me points to the ground lost in August, the optimist highlights the progress from May lows and the fact we remain above the 6400 breakout level. The test lower is not unlike the test higher as we moved from July into August. Maybe it’s all part of the 2013 summer pause, a bit higher, a bit lower, keeping us all on our feet with some interesting moves. Comparing this summer and last there are also similarities, albeit with a 1-month lag. The rally from early June 2012 saw a pull-back in late July which then went on to power higher by mid-August. While it flirted with March highs for the rest of the year, this at least gives us the possibility of a revisit of our recent May highs – still 6% upside from here, equating to a decent risk reward of 4.6x compared to the downside to potential support at 6400.

As always, enjoy your weekend – not quite as sunny, but still nice and mild

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