FTSE down as manufacturing PMIs disappoint

The FTSE is tracking the major global indices lower. As we go to press, the UK benchmark is down almost 50 points or about 0.7% at 6550 and threatening to break further lower. Sentiment has taken a knock from the weaker PMI figures out of China and the Eurozone. Unsurprisingly, it is the commodity-linked stocks that dominate the bottom half of the FTSE with Anglo American, Rio Tinto and BHP Billiton being the worst performing stocks with losses of around 2.5 to 2.9 per cent. Providing some support to the index is engineering and support services firm Babcock, and the world's largest auto catalyst maker Johnson Matthey. These stocks rose thanks to their better than expected earnings results and positive forecasts.

China’s manufacturing PMI fell to a six-month low of 50.0 in November, compared to expectations of 50.2 and October print of 50.4. In addition, the new export orders sub index fell to a seven-month low. In Japan, the manufacturing PMI edged down surprisingly sharply to 52.1 from 52.4 in October. Meanwhile things went from bad to worse in the Eurozone. The overall composite index eased to 51.4 from 52.1 last month – not only was this an unexpected slowdown, it was also a 16-month low. The biggest concern was the fact the German manufacturing PMI avoided falling into the contraction territory by just a hairline: it was right on the 50.0 mark. The French manufacturing PMI was at 47.6, once again remaining below the expansion threshold. The French services PMI was also in the contraction territory. Meanwhile, UK retail sales were stronger than expected in October, rising 0.8% month-over-month. This however was overshadowed by the weaker PMIs and its impact was only felt in the currency markets.

But is disappointing data really bad news for equities?

So, overall it has been a very bad day for the global PMI surveys which does not bode well for the fourth quarter GDP. But the disappointing data does raise the prospects for further central bank action, especially in the Eurozone. Therefore it could be argued that the weakness in the PMIs could be positive news for equities in the medium term as it means the record low rates, QE and other unconventional stimulus measures will likely remain in place for longer than expected. In the US, the FOMC minutes revealed a slightly more dovish message than expected last night. This raises the possibility that US interest rates may stay at their current low levels well until after the second half of next year. This will especially be the case if inflation in the US continues to remain below the Fed’s target of 2%. But if the CPI can surprise to the upside, the Fed might even start contemplating raising interest rates sooner. Thankfully, we don’t have to wait long to find out how inflation – or lack thereof – is shaping in the US. The CPI is due at 13:30 GMT and is expected to have fallen 0.1% month over month compared to a 0.1% increase last time. Core CPI on the other hand is expected to have increased 0.2% on the month. On Tuesday, the PPI measure of inflation surprised to the upside, so there is a chance we may see another positive surprise today as well.

Technical outlook

At the time of this writing, the FTSE was testing its 100-day moving average (6650) as support after breaking below its 200-day SMA (6695) earlier. On Tuesday, the index had already reached the 78.6% Fibonacci retracement level of the last downswing (around the 6725/30 area). With all these technical factors converging in close proximity of each other, the weakness is perhaps not entirely surprising from a purely chartist’s point of view. But despite today’s weakness, the overall technical picture on the FTSE is still somewhat positive and points to further gains in the near-term. The v-shaped recovery since the middle of last month suggests to me that the index has potentially enough juice left to lift it towards the multi-year highs of around 6900 before the year-end. But if some of the key support levels start breaking down now then we may see more buyers exit the market and this could put further downward pressure on the market. The next key support level below the 100-day SMA is around 6590/6600 area, which was formerly resistance. If that breaks down then we may see a deeper retracement towards the 38.2% Fibonacci level of the last upswing, at 6477. Shorter-term speculators may want to watch the 6550 level very closely because the index has also broken out a bullish channel. Thus if 6550 breaks down then we could see the sell-off accelerate later on today or Friday. Meanwhile swing traders may be concerned by the fact that the main moving averages (50, 100 and 200 day SMAs) are all in the wrong order now. For some, the moving averages being in this order is a no-go. While this does not mean speculators will necessarily be looking to sell this market – as the technical outlook on most of the other global indices are still positive – it could mean that the lack of bullish interest may dwindle around these levels. As such, the FTSE may fail to reach or surpass its 1999 record high (6950) for some time yet.