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UK stock market commentary (December 8, 2011): Can the EU summit change everything?

The European trading session gets underway and today all eyes will be on the summit.  It’s being billed as make or break for the survival of the EU in its current form as politicians attempt to impose deeper fiscal union amongst the member states and try to put an end to the escalating debt crisis.  The problem is it’s yet another question of haven’t we heard this all before?  The Cannes G20 summit only a few weeks ago was supposed to be the make or break deal for the EU but that ended in a damp squib and was followed by pleas to emerging economies to assist in beefing up the EFSF’s firepower, to which they simply said no.

Even though the task faced over the next couple of days to pave the way for a new Europe is almost insurmountable the markets continue to remain positive about the prospects for equities.  US markets remained well supported overnight and yesterday’s sell off in Europe, which followed reports that the proposal to combine the EFSF and ESM was rejected by Germany, was very short lived.  In fact most sell offs so far this month have been short lived showing that investors are buying the dips and the bulls seem to be happy with the prospects for equities into the year ahead.  They are brave bulls indeed as there’s still a huge amount of bearish sentiment out there and belief that this year’s Christmas rally, if it continues, could be met by substantial barriers in the New Year.  It’s still difficult to get too excited about stocks when the outlook for growth is so bleak and the threat of another recession is still very much apparent.

So the FTSE is floating around in positive territory at the moment trading at 5565 at the time of writing.  Yesterday’s weakness saw the index dip back to 5500 but as mentioned this was for a very short time before recovering in conjunction with the strength from US stocks. You get the feeling that US investors are brushing aside the concerns surrounding Europe at the moment, but they will be sure to be keeping a close eye on proceedings over the next couple of days.  Levels to watch remain the same as they’ve been for the last couple of days with near term resistance at 5675 and 5720 and support at 5490/20 and 5350.

Trading might be slow ahead of the central bank meetings today with the BOE first and then the ECB.  The ECB is seen as the more important one as a cut of 0.25% is expected with the new President unwinding the tightening done by his predecessor.  Given the ongoing turmoil there is a slim chance of more of a cut to take the base rate below the 1% level but this might spook the market.  The statement that follows the decision will also be closely listened to in order to see what more Mr Draghi has to says about a possible increased role for the ECB.

FX traders have been largely focused on the euro rather unsurprisingly and this morning the single currency is trading at 1.3420 against the dollar at the time of writing.  Since the end of October the trend has been very much downwards for the euro, capped by a downward trend line but major support around 1.3200 remains in place.  So key levels for EUR/USD to watch over the short term are 1.3485 and 1.3520 to the upside and 1.3350/00 to the downside with the bigger support seen at 1.3200 as mentioned.

Gold has also seen its fair share of volatility in the past few days.  The precious metal is increasingly becoming a tough one to call compared to when it was almost a guarantee that any dips would be followed by another push higher.  At the time of writing the yellow brick is trading at 1739 and for now it just seems to be forming a little upward channel with key levels seen at 1746/54/62 to the upside and 1722/00 to the downside.

Brent has been oscillating between 106 and 112 bucks a barrel as traders in the black stuff also await the outcome of the two day EU summit.  Any further strength in equities could be met by equal strength in commodity markets so the bulls will be closely watching for a break above 112 to the upside whilst bears will be focusing on support seen at 108.30 over the near term.  At the time of writing Brent is at 110.20.