Interactive Investor

FTSE 100 rockets as bulls take charge

29th September 2016 12:28

Lee Wild from interactive investor

Yesterday, I wrote that the FTSE 100 was "reaching an interesting time". A downtrend since the April 2015 record high and uptrend from the June 2016 low meet in a few weeks to form a wedge pattern. That could mean fireworks. Another assault at resistance failed Thursday, but the bulls are back in charge, for now, increasing the chances of breaking virgin ground.

Miners and financials did well yesterday, and they're among the big winners now. It's the oil majors that lead the pack, though, after shock news that OPEC had actually agreed at a meeting in Algiers to cut crude production.

It's the first time that feuding members of the oil cartel have been on the same page since 2008, so the enthusiastic reaction to what is a relatively modest objective - a drop in output to 32.5-33 million barrels a day - is understandable.

Whether oil ministers walk the walk is another thing .We'll only know at the November meeting in Vienna. It's worth remembering, however, that Russia is producing more oil now than at any time since the Soviet era, Iran is pumping like crazy, and Libya is coming back on stream. It'll take a serious deal in two months' time to make a move above $50 a barrel stick.

Despite doubts around any OPEC deal, it's 'risk on' again Thursday, and Royal Dutch Shell is up over 5%. Oil prices must rise further if it's to keep paying the super-generous dividend. BP is close behind, but also needs the extra revenue. Both mid-cap and AIM explorers are bid higher, as are the oil services guys like Wood Group and Petrofac.

The FTSE 100 traded as high as 6,935 in early trade, its best in a week. That's the level of resistance traced back to the 27 April 2015 all-time high at 7,122. Make a move above the line stick - it's asking a lot for that to happen this session - and there's clear air to 7,000. Fail here and the uptrend support kicks in, currently at 6,800.

Things might have been different had blue-chip outsourcer Capita not issued an ugly profits warning. Blaming delays implementing a new IT system for the congestion charge, and a possible legal spat with the Co-op Bank over its mortgage processing contract, Capita shares plunged 30%.

However, analysts at Barclays are clearly backing the 'risk on' rally and another move higher. "The relatively high equity risk premium makes it important that investors accept exposure to equity risk when event risk is not excessive," they wrote Thursday. "One can never be completely sure, of course, but the remainder of 2016 looks to us like such a period." Brave words.

Worries about the immediate impact of the Brexit vote were overdone, and serious concerns about Chinese growth have not materialised. OK, these issues have been postponed, not resolved, admits Barclays, but it prefers the "make hay while the sun shines "approach.

"We think the macroeconomic backdrop has improved enough for the rest of 2016 that it justifies a tactical shift to risk assets as we enter fourth-quarter."

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.