Stock markets are in the red at the start of a fresh week after some overall declines at the end of last week. European indices are down approximately 0.5%, while futures predict that the S&P 500 will open down 0.4% later on Monday. Fears about inflation in the US, which has increased speculation about the contents of the Fed meeting minutes, which are scheduled for release on Wednesday, is one way to read today’s lacklustre start for markets. However, we fail to be convinced that the Fed will change track because of April’s higher than expected inflation reading. We also believe that strong corporate earnings and continued strong inflows into US and global equity funds mean that recent dips in equity prices will provide excellent buying opportunities.
What next for the FTSE 100
Over the weekend, fears about the Indian variant of coronavirus seemed to fall to the wayside as more evidence suggested that current vaccines do a good job at protecting against this more transmissible form of the virus. Due to this, the UK’s economy has opened up further today and other European economies have also seen the easing of some lockdown restrictions. However, this has not stopped the decline in the FTSE 100 index at the start of this week. Issues around an investor showdown for GlaxoSmithKline, further declines for airline giant IAG as fears grow for the summer holiday season, and losses for energy companies have weighed on the index at the start of this week. We do not believe that last week’s sell off, and even today’s smaller decline, is a reason to panic about the prospects for the UK index. In fact, we continue to think that its outlook remains bright. A low price to earnings ratio compared with its peers, a stable political sphere post Brexit and a strong economic recovery on the cards are all reasons to keep faith with the UK index. We would add that declines for stocks such as Burberry, 3i Group and banks including HSBC and Standard Chartered appear to be temporary.
Why HSBC could bounce back, but cyber security concerns could limit upside
Decent earnings reports for 3i and Burberry last week are the most likely reason why some people are scaling back their holdings of these two shares, however, we believe that any weakness will be bought into, as the time is ripe for future decent earnings reports for these two companies and we remain bullish on their prospects. HSBC is the 5th largest faller in the FTSE 100 on Monday; however, this is down to breaking news about a text message scam that has been sent to HSBC customers. While time will tell if this is a major data breach that allowed the scammers to get HSBC customers’ phone numbers, for now HSBC has published warnings to customers not to open the link in the SMS message. There have been a number of cyber-attacks on major global outlets this week, including the Irish health service, thus HSBC’s share price could recover as the market focuses on the next potential victim. However, we would urge caution with HSBC’s share price in the next day or two, as investors could punish the stock if a data breach has been caused by a lapse in HSBC’s cyber security systems.
FTSE 100 and the 7,000 handle helps to propel GBP/USD above $1.41
The next move from the FTSE 100 will be worth watching closely. It currently remains above the 7,000 level, if this level holds as decent support then we could see it act as a springboard to further gains. However, if the index falls below 7,000 then we believe that it will rely on two external factors to get it back above this key psychological level and onwards to further gains. Firstly, it will rely on Wednesday’s Fed meeting minutes, and more reassurance that the Fed will look through this period of strong inflation and will not alter current monetary policy. Secondly, it requires continued confidence that the UK economy is returning to normal after the Covid pandemic. While there was good news on the efficacy of vaccines on the Indian variant of coronavirus, there is still some concern that further reopening on 21St June will not go ahead, such as the end of mask-wearing and more large-scale events, as fears about Covid persist. We shall have to wait and see if next month’s reopening will occur. For now, the financial markets are taking a cautious approach to stocks this week, while the mood is more upbeat in the FX space, with GBP/USD above $1.41 at the time of writing. We continue to expect further GBP gains, and we may see $1.45 by the end of the summer. Overall, the dollar upside remains limited due to wavering US Treasury yields and a persistently dovish Fed.
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