City traders dancing 'closer to the exit'

A month-long losing run ended last week, and the FTSE 100 need only stay above 7,350 to make it consecutive weeks of positive returns. This overall sideways move can make things uncomfortable, however, and investors remain twitchy.

We discussed last week the current nature of the financial markets, and what might disturb the status quo, concluding that a decline off the June high near 7,600 was "hardly enough to set alarm bells ringing".

However, we ackowledged that a correction is inevitable at some time, and it's a point that was underlined this week by Ray Dalio, chairman and chief investment officer at Bridgewater Associates. In a note discussing the end of central bank policy tightening, he said:

"We are at the beginning of the late-cycle phase of the business/short-term debt cycle, in which central bankers try to tighten at paces that are exactly right in order to keep growth and inflation neither too hot nor too cold, until they don't get it right and we have our next downturn.

"Recognizing that, our responsibility now is to keep dancing but closer to the exit and with a sharp eye on the tea leaves."

That's nicely put. Not time to sell, but the wise investor will be vigilant, watching for that policy mistake.

Still, for now markets are holding up reasonably well. As the chart above shows, things are bubbling up nicely for break either way as the downtrend and uptrend lines converge. There's also technical support at a little under 7,400 and again at 7,300. Watch closely.

A slightly weaker dollar explains why miners figure heavily among the best performers over the past few days, led by Glencore, Antofagasta, Anglo American and BHP Billiton.

It's been a grim 18 months for telecoms struggler BT, what with a profits warning, an accounting scandal in Italy and issues with the regulator. But John Karidis, an analyst at Numis, reinvigorated the share price with bullish praise.

"Too bearish," he says of the current mood toward BT, initiating coverage with a 'buy' rating and 390p price target. It's lifted the shares back above 300p for the first time in a month. Those who got in recently will be grinning, but patient long-term shareholders will be praying Karidis is still too pessimistic!

Further down the blue-chip index and there are modest gains for banks, among them HSBC, Barclays and Lloyds.

In the Bank of England's second-quarter credit conditions survey, it seems trends seen at the beginning of this year spilled over into Q2. There is pricing pressure, but volumes remain robust, credit quality has improved in mortgages and corporate lending and a deterioration in consumer credit is from very subdued levels, note analysts at Barclays.

"Overall this points to solid retail and commercial banking results from Lloyds, RBS and Virgin Money in 2Q17 - we continue to prefer Lloyds and Virgin Money amongst UK banks."

UBS is fan of Lloyds too, pointing out that the UK high street lender has the highest dividend yield in Europe. "With valuations where they are we have a skew towards strong-capital, high-yield names like Lloyds," it says.

Mid-caps have eked out gains, too, although the FTSE 250 used up a lot of energy bouncing back from a mid-week sell-off. One of the most spectacular crashes of recent times at construction firm Carillion will not have helped.

Its share price plunged from 192p to below 50p briefly, as a profits warning and big write-down left the army of short-sellers betting against highly-indebted Carilion began popping champagne corks. A rights issue looks very likely.

Investor favourite KAZ Minerals is extending gains and is in sight of a four-and-a-half-year high just above 600p. Galliford Try, one of the worst performing housebuilders of the past 12 months, leads the second-tier following an optimistic trading update.

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.