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Where next for the FTSE?

Created:
4 July 2008
Written by:
Claer Barrett

As weeks go, the past five days on the FTSE have been nothing short of abysmal. An outpouring of bad macroeconomic news - rising oil prices, worries over European interest rates, poor manufacturing figures, lower UK house prices and fears over US employment data - had harsh repercussions across the FTSE, which on Thursday, hit its weakest level since December 2005.

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On top of all this, there was plenty of company-specific woe, too. Shares in Britian's biggest housebuilder (by volume) Taylor Wimpey collapsed as backers failed to provide fresh equity, while shares in healthcare group Southern Cross crashed as sales of the freeholds of some of its nursing homes were delayed.

Then, bellwether retailer Marks & Spencer shocked the City with an unexpected profits warning due to falling sales. At least the headline writers enjoyed themselves taking the rise out of the retailer's Simply Food adverts.

Shrare price reactions to all of these events were savage. M&S lost almost a quarter of its value, Taylor Wimpey halved, while Tanfield, a maker of industrial 'cherry pickers', lost three quarters of its value following poor sales.

Clearly, we're in a nervous market, where every piece of bad news is magnified and good news is largely ignored. But with both the UK and the US entering bear market territory, and the markets having their worst first half for decades, the big questions is: where next? Here's some likely scenarios:

The technical view:

The charts look dire. Technical analyst David Linton at Updata, reckons that the FTSE100 could fall all the Ominously, he predicts 'the worst is yet to come', and believes the FTSE 100 has a low of 3,500 'clearly in its sights.' See City Trades: FTSE 100 for more (you'll need to register (it's free) first).

The big picture:

Our companies editor Simon Thompson has been bearish on the stock market since the start of the year. And to good effect; the three short positions he has recommended in his trading column since January are now up 55 per cent, 54 per cent and 23 per cent. Rampant oil prices and the weight of stock market history are two reasons for his pessimism. A third is the massive bond sell-off he thinks is about to happen in the US. Falling bond prices mean rising yields - and higher yields are bad for shares.

See 'Goodbye, Mr Bond' for more on this - or read more of Simon's columns on his IC home page. You'll need to be an IC Advantage subscriber to do this (see below).

The economic picture:

Had enough of bad news? Then you should catch up with our economic columnist Chris Dillow, who can always be relied on for some contrarian thinking. Among his current theories are that a) the US economy is already over the worst (see Markets look to US recovery), that falling UK house prices are of little relevance to share prices (see What house problem? ) and that several leading indicators suggest that the UK stock market could also be set for a recovery (see Lead indicators turn rosy for Footsie). All these articles require registration (see below).

And for those of you in need of some seriously good news... at least it's Friday.

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