FTSE rallies as M&A talks, Chinese GDP and US earnings underpin risk appetite

Just less than a week ago, the outlook for global stock markets was looking somewhat bleak. Caution ahead of the US earnings season and concerns about the health of Portuguese banks had caused the major stock indices, especially in Europe, to fall sharply. But we have since witnessed a strong recovery, mainly because of the fact that the main US banks have reported surprisingly good quarterly earnings results. As a result, the Dow has rallied to a fresh all-time high while in Europe the FTSE has been among the top performers.

In the UK, sentiment has partly been boosted by M&A talks concerning drug makers Shire and AbbVie, and aerospace manufacturers Meggitt with United Technologies. The share price of Shire has risen strongly in recent days while Meggitt is leading the FTSE with a gain of about 10% today. Meanwhile EasyJet is more than 5% higher after Goldman Sachs said the budget airline’s shares may rise about 60 percent.

The UK index has been lent additional buoyancy by stronger Chinese data overnight. The world’s second largest economy expanded at an annualised pace of 7.5% in the second quarter, up from 7.4% in the first three months of the year. Industrial Production grew by an annualised pace of 9.2% in June, topping expectations of 9% and also May’s reading of 8.8%. As a result, commodity-linked stocks have gained, though with the exception of some precious metal miners due to the weaker gold and silver prices.

As we reported on Thursday, the FTSE has also taken a technical rebound after it found strong support at 6645 – a level which ties in with a medium-term bullish trendline. As a result, the index has made back more than half of the losses it suffered since the start of the month. At the time of this writing, it was testing the 61.8% Fibonacci retracement level at 6885/90. This comes in around 15 points ahead of the 50-day moving average at 6805/10. Although the index is already more than 1% higher, the index could extend its gains once US traders come into play. As before, the key resistance area remains around 6865/85 where it has struggled for more than a year now. A close above there is needed if we are to finally see gains similar to those witnessed in the US.