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The Accumulator: Draghi and oil save FTSE from bears

A rally in the oil price and the prospect of more European stimulus has helped the FTSE 100 banish the bears and end the week on a high.


by Sam Antrobus on Jan 22, 2016 at 17:52

The Accumulator: Draghi and oil save FTSE from bears

A week that saw the FTSE 100 officially enter bear market territory as it endured its worst one-day fall since last year’s August turmoil has ended on a high, thanks to Mario Draghi and an oil price rally.

The UK blue-chip index’s 203-point, or 3.5%, fall on Wednesday brought the decline from last April’s all-time high to more than 20%, ushering in a bear market.

It was oil, rather than China, responsible for the latest painful losses. The price of Brent crude tumbled to just above $27 a barrel on Wednesday, as the International Energy Agency warned the oil market could ‘drown in oversupply’.

It was shaping up to be a week much like the two that had preceded it, with all the major global indices in the red. But markets finally snapped their losing streak on Thursday when European Central Bank president Mario Draghi dropped a hint more quantitative easing, and further interest rate cuts, could be on the way.

The relief rally this sparked went up a gear when the punishing rout of the oil price finally abated, as a cold snap in the US boosted demand for heating oil and investors who had been ‘shorting’ crude, or betting it would fall, cashed in on the plummeting price.

The practice of ‘short covering’, buying back an asset sold previously at a higher price, typically sends the price higher.

Markets two-day rally has helped to repair some of the damage done this week. Our exclusive Accumulator data table, which covers the five days to yesterday, shows the extent of the losses until today’s strong rebound.

The scale of today’s rally means the FTSE 100 has not only clawed back its losses, but closed the week 1.7% higher.

For markets worst hit by the market turmoil, the rebound has been even more impressive. Japan’s Nikkei 225 like the FTSE 100 fell into a bear market last week, but today staged a near-6% rally.

But leading the way this week are European markets. As oil-importing nations, their stock markets have proved more resilient in the face of crude’s tumble, and having joined in today’s relief rally, have ended the week posting their biggest gains since October.

In a topsy-turvy week, another big move – the pound’s tumble to a seven-year low against the dollar – also reversed. Our Accumulator table shows the yen, euro and dollar all gained against sterling until the end of yesterday, driven in part by dovish comments from bank of England governor Mark Carney.

Having last year argued that an interest rate rise would ‘come into sharper relief’ at the turn of the year, Carney said this week that market volatility had rendered the decision a straightforward one: ‘now is not yet the time to raise interest rates’.

While those comments sent sterling plunging, the pound has been enjoying a relief rally of its own, and now stands higher against the dollar over the week.

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