FTSE 100: Further Losses Possible On Soft Commodities

With commodity prices sliding it is not surprising to see the FTSE 100 trading at current levels. The overall trend is bearish below last week’s high of 6172, and as long as this high is respected I assume that the FTSE 100 will try to reach 6000 (and it might even reach last week’s low of 5861).

A break to 5861 may trigger a slide to the August low of 5763. However, a further slide in commodity prices is probably needed for a break to the 5861 low. Something that is not unlikely given the current trend of the USD Dollar.

Commodities Weigh Heavy

Over the last month the total-median-return for shares in the Basic Materials Sector is negative 13%, followed by the Gas and Oil Sector (which is down by 11%). The losses in these two sectors dwarf other sectors, as an example the third weakest sector is Telecoms which is down by roughly 4%. This highlights that it’s primarily the commodity markets which is driving FTSE 100 losses.

FTSE 100 Fair Value

Using the Bloomberg Commodity index and regression analysis spanning the last 6 month, the analysis suggests the FTSE 100 should be trading near 6050. This means that the FTSE 100 is reasonably valued at current levels (6090) and a further slide in commodities are probably needed to trigger more FTSE 100 losses.

This is by itself probably likely, as I expect the Dollar to gain further in the months ahead which should weigh on commodities.

One alternative scenario is that the markets shrug off the risk aversion instilled by the first Fed rate hike and we see a Christmas rally. This may boost the non-commodity related sectors of the FTSE 100. However, this is not my main scenario at this time given that the S&P 500 is not at attractive levels for long positions and the DAX 30 is choppy.