FTSE tread water as UK miners smirk, ECB to sit still

FTSE trades rangebound as UK miners fear a renewed slide in commodity prices. Copper and iron ore are slightly better bid today; yet there is little evidence that this week’s downside push has come to a point of exhaustion.

Anglo American announced it lowered its copper, iron ore and diamond production in Q3; diamond production fell by 27% significantly more than anticipated. Considering that the diamond business has been the major source of revenue in the first half of 2015, allowing the company to generate a decent 16% of margin on its revenues in an environment of tumbling commodity prices, the cut in diamond production could weigh on AAL’s earnings in the second half. The earning per share estimate declined 6.70% over the past four weeks, the net income has been revised down by 1.16% to $1.144bn in 2015.

Anglo shares lost 3.50% at the LSE open and currently trades below 600p. Elsewhere, Pearson extended losses after being cut to ‘neutral’ by JPMorgan.

Chinese President Xi’s visit in the UK has already led to a nuclear deal with the creation of an estimated 4000 jobs. We have seen limited reaction from the market so far. Increasing the nuclear activity in the UK will certainly trigger a reaction on the political end, therefore the conviction is not entirely there.

In the FX market, the pound is still struggling to fight back 1.55 offers against the US dollar. The 1.55-barrier to a further appreciation is presently keeping the FTSE in the positive consolidation zone; technically this is above 6225/33 area (Fib 38.2% on Sep 29 – Oct 9 rise).

It is certainly too early for the ECB to act

The European Central Bank meets today. The consensus is the status quo in the ECB’s monetary policy even though we hear rising voices in favour of deeper negative deposit rates and the possibility of an extension in the Quantitative Easing program.

We do not rule out a possibility of looser ECB policy before the end of the year yet we believe that today is not the day. The ECB is more likely to sit back and watch the macro data before speeding up its asset purchases. Simply because the inflation expectations seem to have improved through the month of October.

In fact, the 5y5y euro inflation swaps rebounded to 1.70% after bottoming at 1.56% end of September.

Euro traders remain on the sidelines heading into the ECB decision. The euro failed to clear the 1.15-resistance against the US dollar last week on possibility of additional stimulus from the ECB.

Either way, President Draghi is expected to talk down the euro. The euro risk is two-sided. If ECB fails to satisfy the EUR doves, we may well see a bounce back to 1.15 level and above. While a satiating dovishness from the ECB could reinforce the euro depreciation against the USD. The 1.1360 level (Fib 38.2% retrace on Oct rise) should distinguish between a fresh bounce to 1.15+ and a deeper downside correction. Key supports are eyed at 1.1270 (Fib 38.2% retrace on Dec’14 – Mar’15 decline) then 1.1180/27 (area including the 100 and 200-dma).