FTSE soars on ECB QE report, dovish BoE and solid earnings

European stocks have rallied sharply off their lows this afternoon. Sentiment has been lifted on an unconfirmed Bloomberg report which said that the European Central Bank is considering a quantitative easing programme of €50bn a month through to 2016. If true, this would thus be equivalent to €600 billion a year and up to €1.1 trillion until December 2016, depending on the starting date. It would also be significantly more than the previously-reported €500bn, which is exactly why the markets have rallied. However, as mentioned, the ECB has not confirmed the report, so it should be taken with a pinch of salt. That said, they haven’t denied it either, suggesting an official announcement will be made at the end of the ECB meeting tomorrow at 13:30 GMT. If confirmed, it should be significantly positive news for European equities.

Although European stocks have rebounded strongly of their lows, the major indices across the Eurozone are only moderately higher. Traders are perhaps exercising a bit of caution at the moment, especially with the Greek vote looming on Sunday. In contrast, the FTSE is up for a fifth day and is trading a good 1.4% higher in today’s session. UK stocks have found additional buoyancy from several other factors too, not least the positive vibe coming out of individual companies. Today for example, results from Dixons, Pearson, Halfords, WH Smith and Pets at Home have all been positive. On top of this, the latest UK jobs data has shown further strength: according to the ONS, the average earnings rose by an annualised rate of 1.7% in the three months to November, up from 1.4% previously, while the rate of unemployment fell surprisingly sharply to 5.8% from 6.0%. What’s more, the data for the month of December was also strong as jobless claims fell by a good 29,700 applications which were somewhat more than November’s total (29,600) and also higher than the consensus expectations (24,200). In addition, the Bank of England has turned more dovish by the looks of it, which means interest rates may remain low for longer than previously thought. Minutes from the MPC’s first 2015 meeting, held earlier this month, have revealed that Martin Weale and Ian McCafferty both dropped their calls for a 25 basis point rise in interest rates, joining the other seven MPC members in voting to keep interest rates unchanged at 0.5%. The news is potentially bad for the pound, but good for UK exporters. Furthermore, shares in some of the major energy companies have bounced back too thanks in part to a more stable crude oil prices of late.

Technical outlook

The last time we looked at the FTSE was about two weeks ago when I suggested the rally could be short-lived but that there was also a possibility for a sharp move higher if certain resistance levels broke down. As it turned out, our forecast was half-correct as the index did initially fall back and for a moment traded below the then key support and Fibonacci-based level of 6327. However the sellers were unable to push the index much lower than that, leading to a quick rebound. Realising that this was only a false break, the buyers stepped in and drove the index significantly higher. As can be seen from the updated chart, below, several key resistance levels have now been broken, including the prior high of 6640/60. Going forward, this area may turn into support in case of a corrective move in this upward trend. However, as mentioned, the path of least resistance is clearly to the upside now and a move towards 6755 or even 6900 looks highly likely. The first of these two targets converge with prior highs and the 127.2% Fibonacci extension of the BC swing, while the second target is the high from last year and comes in just above the 161.8% extension level. The short-term bias would remain bullish until/unless the FTSE breaks back below 6640.