Weekly Outlook: If China has bottomed then UK stocks could gain

Week gone
Equities posted mixed reactions last week. Whilst Europe closed with strong gains, the US eradicated nearly all of its weekly gains in one sharp sell-off on ironically the 25^th anniversary of Black Monday. 

Macro data from the United States continued to strengthen with core retail sales posting a 1.1 percent climb versus a consensus of 0.6 percent whilst building permits and existing home sales both increased. In Europe, Spain again tested the markets' appetite for “risk” which received a strong bid to cover and saw bond yields fall.

UK energy and basic materials stocks seen gaining
Economists are now calling for a floor in the Chinese economy where they expect a ‘bottoming out’ phase has begun. If that’s true then we may begin to get some of the FTSE 100’s performance back that we’ve lost this year to the likes of the DAX. As it stands there is a near 20 percent spread between the two indices and with 30 percent of the FTSE 100 being comprised of basic materials and energy stocks, if China has indeed found a bottom then some of our worst performing stocks this year could begin to see purchases. With a once in a decade shift in governance, CPI at its lowest levels since 2009 and the opportunity to spur domestic consumption through enterprise, it’s highly likely we’ll get further expansionary monetary and fiscal policies but this may come late 2012/early 2013.   

Week ahead
This week we have German, French and Chinese Manufacturing PMI data being released coupled with advance UK and US Q3 GDP being the main focus for not only the markets but likely Obama’s election campaign too. 

The main near-term risks remain the same as ever, a seemingly overbought stock market that has rallied on light volume and cheap money with no real change to the medium-term outlook for both the macro and micro picture. This suggests we could be in for a tricky couple of weeks of trading as we near the outcome on the US election.

Markets cautious after Merkel's ESM dampener and ahead of US fiscal cliff
German Chancellor Merkel’s dampener on Europe’s use of the European Stability Mechanism (ESM should only be used for teetering financial institutions going forward in the future, debts incurred in the past should be the responsibility of national governments) should be a reminder to all that the consistent problems that are re-occurring month on month, year on year, seem here to stay for the interim and with the US fiscal cliff still looming, I expect the markets to be more cautious when entering for upside gains.

1425 will be a key test (60-day moving average) for the S&P 500 this week, a break beneath will likely take us to 1400 which means the FTSE 100 will likely see 5800. A lot of my longs have been trimmed and I’m net short going into this weeks trade. I’m happy to continue buying the dips but my focus is to squeeze trades and to be more inclined to take my profits or losses early.  

Have a good week’s trade!

Michael