Conversely to a fortnight ago, when we were bouncing  from Feb lows, a bearish 85% of UK 100 stocks look set to close the week in the red. After a flat week last week (50/50 stocks up/down) investors are fretting anew about not just volatility and interest rates, but tariffs, trade wars and political risk. Could this week’s reversal signal part two of February’s correction?

A look at the biggest 5 winners and losers of the week first. Sky has jumped 24% after US media giant Comcast made a better bid than Fox, giving Rupert Murdoch a headache and  raising hopes of a bidding war. Shire sits 6.6% higher thanks to takeover talk, although this is perennial, and once again merely speculation. Burberry (+6%) welcomed a new Chief Creative Office from Givenchy. Persimmon (+5%) offered a big dividend boost alongside solid FY results while, lastly, Evraz (+4%) swung to a FY net profit and highlighted favourable market conditions.

At the tail end, ITV (-10%) suffered from reduced ad spend by previously big spenders and fierce competition from on-line/on-demand content. Fresnillo (-8.5%) was dented by a stronger USD hurting commodity prices, even the safe havens. Rio Tinto (8%) and Glencore (-7%) were also hurt by the USD breakout following Fed Chair Powell’s testimony, and latterly by Trump’s steel/aluminium tariffs. Lastly, Rentokil Initial (-6.2%) fell even after tripling profits as it trimmed guidance and cautioned against FX headwinds.

And so, with most big UK Index moves and news this week being company specific, a look at the trends that dragged the rest of the index lower.

New Fed Chair Jerome Powell’s first public outing as head of the world’s most influential central bank. His testimony to congress was digested as more hawkish than anticipated, investors accepting the Fed’s guidance of three rate hikes this year, and an increasingly probability of one pre quarter. This revived the jitters that started the early Feb sell-off, and saw the USD rally hard, which would normally benefit the UK Index (and DAX) by way of welcome downward pressure on the GBP (and EUR), however, a significant 20-25% of UK Index index exposure to commodities, including metals and, oil weighed more heavily on sentiment than the benefit of this week’s Sterling weakness.

Secondly, Italy goes to the polls on Sunday, and we have anti-European/anti-Euro parties in contention which could revive the concerns we saw over the last 18-months that other countries could follow the UK with a referendum to leave the single market and its currency bloc. Furthermore, Sunday sees Germany’s Social Democrat party (SPD), itself divided and struggling, decide whether to join Chancellor Merkel’s Christian Democrats to form a working coalition which has eluded the nation since last September’s election.

Lastly, Trump has gone for it and followed through on his promise of import tariffs (25% on steel, 10% on aluminium) which adds fuel to the fire of concern about a trade war, not just with China but Europe too. Just when we were getting to grips with rising interest rates  after a decade because the global economic recovery warrants it. Another example of follow-through on the populist protectionist Make America Great Again rhetoric that got him elected. He says “trade wars are good (and easy to win)”, and in a way he’s right if it leads to either lower pricing on imports or more domestic players taking up the sack. But not if it leads to lower supply and thus higher pricing, which is a risk. And not if it results in retaliatory tariffs which hinder export of US goods.

Then we have Brexit, with UK PM May only this afternoon admitting that Britain is after all unlikely to have its cake and eat it, with some big compromises having to be made. Not great to hear for the economy, but the simple admission (albeit tardy) should thaw the ice with Brussels about what Brexit ultimately is and allow negotiations to move on, making up lost time.

It’s been an exciting week, and we could well be set for further downside to revisit Feb lows as investors digest the latest hurdles to face stocks, commodities and currencies . Meaning there may be attractive short-selling opportunities for FSTE shares next week. That said, so long as the longer-term uptrend remains intact, this could ultimately leave us with another bite at the cherry in terms of a bullish turnaround from Feb lows and another go at recovery, a repeat of the sharp rebound we saw 6-7 Feb and then the shallower recoveries on 9-19 and 22-26 Feb.

If however, we’re set for even more downside then so be it. Is that a big bearish flag I spy, pointing several hundred points lower? There’s no law against trading short – no moral dilemma – it’s about making money whatever the markets are doing. Everybody knows share prices don’t just go up forever. Nor do they just go down. They do a bit of both. A long-term uptrend will have both its up and downs. A long term downtrend will have both its downs and ups. It’s about knowing where you are in the trend and trading what you see, not what you want to see.

To be kept alert of all the UK Index trading opportunities next week, get access to our research here.

Mike van Dulken, Head of Research, 2 Mar 2018