It’s been a fascinating week for UK Index watchers like us and, more importantly, for our trading clients. Whilst the UK blue-chip UK 100 index looks set to close -0.7% for the week, -2% for the month and 4% away from its record high, we see reason to cheer this latest correction. There are valid reasons for recent weakness (technicals, bond sell-off, strong pound etc). There are equally valid drivers for why this may offer a buy-the-dip opportunity. After all, we’ve been here several times already and still remain close to early June’s record highs.

For those who recently complained that markets were too high, perhaps this is the cheaper entry point you were looking for. The old trading adage “Sell in May and go away” would have proved expensive for traders, depriving them of a 5% rally and 4% sell-off. And now perhaps we have another chance of a rally?

Examples of recent pullbacks include October (-6.5%), Jan (-3.5%), March (-4.5%). June’s high-to-low sell-off equates to just over 4% – not dissimilar to those we have seen over the last 9 months. With the index having already bounced from yesterday’s flirt with 7300, to hold its 7-month trend of rising support, there could be potential for another 10%, 5% or 7% rally, respectively, like those which followed the aforementioned declines. July could prove just as exciting as all but one month (March) of the first half of the year.

Something that makes me optimistic is how the index looks set to close the week. A not insignificant 25% of UK Index members are likely to finish flat to higher. Furthermore, the composition of that 25% is very much skewed towards risk-appetite, the top ten dominated by investor favourites Banks and Miners.

How so? Banks (and their shares) have embraced – maybe even misconstrued –  more hawkish rhetoric from major central banks (Bank of England, European Central Bank, Bank of Canada) which adds to the US already rising rates and could mean we are closer to interest rate hikes to boost banking sector profitability even further. For more on this subject see what I wrote last week. If the comments have indeed been been misconstrued, as some are arguing, surely markets will embrace the status quo for a little longer?

As for the Miners, they have basked under a supportive oil price rally and gains for metals prices. While the former has been helped by a technical rebound from 10-month lows, the latter has been fuelled by dollar weakness derived from: 1) scepticism about US growth with Trump struggling to get anything approved by congress; 2) slower growth and inflation may see the US Federal reserve slow up on its course of rate hikes; 3) strength in GBP and EUR pushing against an already strong USD. Fresh positivity towards Chinese growth and demand may have also played a part.

One notable exception from the commodity space, despite the oil price rally, has been the oil majors, who have suffered under the weight of a strong UK pound sterling. This made them less attractive to income seekers with their dollar and euro dividends. These have become worth less as the pound strengthens in the wake of surprisingly hawkish chat from Bank of England Governor Carney, his colleague Haldane and PM May taking control of Parliament and, hopefully, Brexit.

It’s rare that a decent UK Index rally excludes these two key sectors. Without optimism, and thus share price gains for them, it’s difficult for investors to believe in the necessary positive outlook for economic growth to help the rest of the index. All eyes will be on this pair and how they kick off the new trading week, month and semester. Fear the dip or buy the blip?

To stay ahead of the curve and in touch with profitable trading opportunities get access to our research here with helpful charts and analysis to assist you in your trading or investment decisions. It won’t take long to see why April saw us voted Best CFD Research Service and why our firm is nine-time winners of the Best CFD Provider title.

Mike van Dulken, Head of Research, 30 Jun 2017