FTSE 100 Stock Market Index Forecast To Go Higher

By: Seven_Days_Ahead

Global equity markets have been bullish in recent weeks supported by expectations that the Fed will restart its QE program and buy more US Treasuries. The Bank of Japan too, recently cut rates to zero and announced a Bond purchase program which is seen as a prelude to full blown QE.

The Technical Trader’s view:

WEEKLY CHART Earlier today the possibility of a completed continuation Flag was very real – but the market drifted back within the congestion area. Yet that is still a possibility so watch for a close above the higher falling diagonal currently at 5742.

The Macro Trader’s view:
Global equity markets have been bullish in recent weeks supported by expectations that the Fed will restart its QE program and buy more US Treasuries. The Bank of Japan too, recently cut rates to zero and announced a Bond purchase program which is seen as a prelude to full blown QE.

In the US, deflation is feared but not yet a fact, whereas in Japan it has dogged the economy for years. In the UK CPI has been above target for months, yet the Bank of England appears to be moving towards a new tranche of QE.

We think the FTSE has benefitted over recent weeks from bullish overseas sentiment driven by those factors detailed above. What makes this market look all the more impressive is that for several months the UK Government’s Spending review had been hanging over it like the sword of Damocles. The spending review is now known. The MPC minutes released yesterday morning showed policy makers still edging closer to restarting QE in the UK. Why though, if CPI is so far above target?

The simple answer is that the government has cut public spending by £82.0B. This will see around 500,000 public sector jobs lost with perhaps a similar amount in the private sector, as a result CPI should correct to a level below target allowing the Bank to plug the gap created in the economy with a fresh round of QE.

So rather than fret about the risk of an economic slowdown in the UK due to the spending cuts, investors are looking to the positives and these are:

•  High probability the Bank of England will restart QE,
•  Interest rates look set to remain unchanged throughout 2011,
•  The economy should rebalance away from the public sector towards the private sector,
•  The UK economy should benefit not just from easier UK policy, but also from QE2 in the US, and
•  The threat to the UK’s AAA rating should now be removed.

In short, now that the Public spending review is out of the way, the market has had a hump in the road removed and can focus on the Bank of England’s likely policy response and an economic recovery that ultimately should be built on sounder private sector growth rather than public spending largess.

Mark Sturdy
John Lewis

Seven Days Ahead
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Mark Sturdy, John Lewis & Philip Allwright, write exclusively for Seven Days Ahead a regulated financial advisor selling professional-level technical and macro analysis and high-performing trade recommendations with detailed risk control for banks, hedge funds, and expert private investors around the world. Check out our subscriptions.

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