UK bluechips broke a four-day losing streak in thin volume on Monday as mining stocks rallied on speculation about new economic stimulus from the world's top metals consumer, China. Mining shares rose 1.3 percent after weak manufacturing data from China raised expectations that Beijing would launch new monetary stimulus measures to revive its economy.
"China is very reminiscent of what we're seeing at a global level," Chris Wyllie, chief investment officer at Iveagh. "We seem to have this drug-addicted market, looking for stimulus in China, overreacting to growth slowdowns, assuming that it must inevitably be the harbinger of the next bear market, and therefore looking for the drug fix in response."
Shares in the UK mining sector have fallen around 20 percent since early August on the back of a largely lacklustre batch of trading updates, which showed that second-quarter earnings fell on average by 44 percent due to the decline in demand from China. Wyllie warned that Chinese authorities may be reluctant to act given that part of the slowdown seen in new orders was due to anaemic growth in the euro zone and could not be stimulated by Beijing.
"We need to see the correct monetary responses in Europe and that would help China," he added. The fund manager saw "potential for disappointment" from the European Central Bank's policy meeting on September 6, where he did not expect chairman Mario Draghi to announce purchases of sovereign bonds, as some in the market had been hoping for.
While keeping a moderately bullish stance on global equities, Wyllie had been protecting gains accrued during the summer rally by buying put spreads on his equity holding over the past two weeks. Under a put spread strategy, an investor buys put options at a specific strike price while also selling the same number of puts at a lower strike price. These are useful for fund managers and other investors who think the market will only dip moderately.
The FTSE 100 closed up 46.93 points, or 0.8 percent, to 5,758.41, having shed 2.6 percent over the previous eight trading days, although volumes were low at 47 percent of the full-day average with the US stock market closed for the Labour Day holiday. Among the few heavily traded stocks, Admiral Group fell 3 percent to the bottom of the FTSE, in volume 110 percent of the average, after both Credit Suisse and Canaccord Genuity cut their ratings and earnings forecasts for the UK car insurance firm.
The prospect of further monetary stimulus played a major role in the FTSE's 12 percent rally between early June and mid August. Following Federal Reserve chairman Ben Bernanke's speech on Friday, where he left the door open for more monetary easing, attention is now on the ECB's rate announcement this week.
"The global equity market in June, July and August was very much pricing in stimulus around the world," Stewart Richardson, chief investment officer at RMG Wealth. "We can't just live on words, we need to see action from central banks to move higher from here and there is no action, therefore markets are vulnerable." He added the ECB could not buy bonds in the secondary market until Spain agreed to formal bailout terms, while the Fed and Chinese central bank were growing less enthusiastic about the effectiveness of non-conventional monetary policy to stimulate the economy.