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The rally in oil markets helps lift the FTSE100

The relationship between the FTSE100 and commodity markets is closely aligned due to the number of mining and petroleum E&P companies within the index. China just announced that should oil get to $130 per barrel or more, they will subsidise their internal market and consumers. The US States are starting to send out cheques to help with the cost of living, as will the UK. This extra liquidity into the markets means traders will find more cash to chase fewer things, so effectively adding to the inflation theme. What we don’t want is a recession, as we’re still nowhere near clear from the COVID-19 shutdowns and economic damage from that period.

Index Analysis

The FTSE100 rallied from nearly 7000 to 7334 from last Friday into today's price action. If the FTSE were to close today at these levels that would mark 4 consecutive green days. Friday into Monday was on the back of improved sentiment in global markets as China eased lockdown restrictions. The Chinese are happy with their current zero-tolerance policy and therefore there is a high probability that the use of lockdowns will continue through this election year. The relaxing of mandatory testing in several Chinese cities has supported commodity demand and lowered recession fears, but today's US Final GDP numbers have signalled that the US economy at least is deteriorating still. Commodity stocks drove FTSE higher toward a one-week high due to its general exposure in the energy markets, with price action pushing through the swing high from the 16th of June and creating a higher high and higher swing low market structure.

UK’s Boris Johnson participated in the G-7 summit this week with an agenda full of things to sort out in regard to Russia. Energy supply issues into Europe and the UK as Russian oil and gas remain in the spotlight, with price caps being implemented on Russian oil adding to a supply squeeze in the near term. Today China announced where they would draw the line in terms of prices they are willing to pay. Turns out $130 per barrel is the maximum they will tolerate. If WTI and Brent go over that, the Chinese authorities step in and subsidise. The fact that a major economy is willing to put out a peg, I don’t see why traders don’t push against it.

Brent has also been rising over the last 4 trading days after the UAE minister indicated the nation is producing near capacity, dampening the expectation of a hike in output to help reach OPEC+ targets.

UK’s GDP data due for release tomorrow will be a key indicator of the overall economic performance and can cap, or boost, gains of the FTSE100 index in the near term.

The ActivTrader sentiment tool indicates that 51% of retail traders are bullish on the FTSE100 index. Multi-national oil and gas companies BP and SHELL were leading stocks at the start of the week with +1.32% and +1.20% respectively and they continue to press on higher.

However, inflation worries in the UK remain a major concern in the near term. The UK CPI data released last week indicated a rise to 9.1% from the previous 9.0% making a fresh 40-year high. The Bank of England has mentioned they expect to see double-digit inflation by the end of this year.

The US just released its final GDP number for Q1, and it came in slightly worse than expected at -1.6% versus -1.5 from the previous reading. This will add fuel to the recession fears and a lack of demand will be bad for Brent, which implies economic activity and growth will also be curtailed.

With sentiment even, we turn to momentum and price action to help guide the way forward. The fall from 7600 from the 8th of June was fast, and that has left some imbalances that we should see price action go up to test. The push through the swing high that was printed on the 16th of June is the signal that the bulls are taking control back from the bears, but as we look across the chart from right to left, it is obvious to see that the range through 2022 has a median price level of 7222, so there is a chance that we do pull back towards the 7200 before possibly running all the way back to 7600 and possibly above.

On the daily chart, the stochastic (10,3,3) isn’t much use as we are also currently hugging the daily 200-period EMA. When price action has moved away from the daily 200-period EMA, the stochastic helps signal trades back to the mean indicator. Whilst the price action is making new higher highs and higher swing lows, I would be tempted to buy the dips.

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