FTSE 100 Tests The Other Side Of Its Weekly Range

The FTSE 100 is soft and briefly traded below this week’s low of 5840. A sustained break to this level may trigger a decline to the August 2015 low of 5768. This scenario is looking fairly likely with the S&P 500 sliding below its weekly level yesterday evening, and the German DAX 30 also near to breaking its weekly low. For the bearish pressure to end, the FTSE 100 needs to break this week’s high of 6011, and at this point bullish traders would be back in control.

The trigger behind the latest round of selling was a slide in crude oil and gasoline prices. Yesterday, the weekly EIA report showed gasoline inventories increasing by 8.43m barrels vs. a Reuters forecast of 2.8m, the week before gasoline stocks increased by 10.57m barrels. We need to go back to December 2014 to see similar strong increases in inventories. This has spooked markets, which seem to treat the build in inventories as a sign of a slowing economy.

With a general risk-off sentiment underpinning trading, the FTSE 100 could easily be dragged lower, however, our fair value models suggest that it will be choppy, as the FTSE 100 is relatively fairly valued in relation to both the DAX and Commodity prices.

Commodities and DAX 30 Suggest that the FTSE Should Be Trading Slightly Higher

Our short-term valuation model based on the last six months of the Bloomberg commodity index suggests the FTSE 100 should be 1.3% high (5970) given the developments in the commodity markets, while using the DAX as the explanatory variable suggests that the FTSE 100 should be trading 3.3% higher (6090). This suggests that the FTSE 100 is relatively fairly valued with no strong need to trade higher or lower.

Data and reports to watch today are the ECB rate minutes at 12:30 GMT (we look for clues to more QE), and U.S Jobless claims at 13:30. A Bloomberg survey projects a decline to 275K from 277k.

FTSE 100 | FXCM: UK100

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