A higher trading range for the FTSE 100.

By Mike Lenhoff 14:23 22- Jul -2009

When things move, they move fast - and we’re not just talking about markets. The picture supporting equity markets has changed markedly in a short space of time. China is leading Asia, including Japan, out of recession, and Asian GDP forecasts are being revised up. In the US the revision is marginal but still upward.

Also in the US, companies reporting for the second quarter are delivering a better than expected bottom line. It is still early days with just about a fifth of the S&P 500 having reported their earnings but, significantly, the ratio of positive to negative surprises has been increasing as more companies report, suggesting that the breadth of the positive surprises is widening. The diversity is clearly welcome news for equity markets and the positive surprises suggest that consensus earnings estimates will be revised up.    

Yesterday’s monetary policy testimony by the Fed Chairman provided a glimpse at what is likely to constitute the Fed’s ‘exit strategy’ when the time comes but, importantly, Mr Bernanke also reassured all that the ‘FOMC anticipates that economic conditions are likely to warrant maintaining the federal funds rate at exceptionally low levels for an extended period.’ This is welcome news for financial markets. 

The cycle of downgrading in forecasts for economic growth and earnings now appears to be ending. A new cycle of upgrading is beginning. The game is no longer exclusively US centric. Emerging Asia, and notably China, is nudging in and, as the growth forecasts go up, expectations for world trade go up too. Japan for example now exports more to China than it does to either the US or Europe.      

The rebound in equity markets from their March lows came out of nowhere and so has the rebound that started last week. After seven straight days of gains, on thin volumes admittedly, a breather is likely. Indeed, a good correction is to be expected, again on thin volumes. However, against a backdrop of improving news flow, it seems to us that another upward phase is likely in anticipation of the earnings recovery that lies ahead. We think the FTSE 100 is heading into higher ground with a trading range of 4500 to 5000. The latter is still our year-end target.