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Reports UK

UK stock market commentary (August 26, 2014): Geopolitical worries or monetary stimulus?

August 26, 2014, Tuesday, 05:04 GMT | 00:04 EST | 09:34 IST | 12:04 SGT
Contributed by Capital Spreads

European equities are set to ease modestly after yesterdays strong gains. The FTSE is set to rise though playing catch-up for yesterday’s absence. The bulls were pretty quick out of the gates yesterday having been imbued by Draghis dovish comments on Friday night. After years of middling reactive efforts to kick start the European economy, traders were glad to see an admission that they weren’t working and that the ECB needed to go on the offensive. Traders were particularly glad to hear the part where he said that the risks of doing too little outweigh the risks of doing too much, believing that a whole artillery battery of stimulus is on its way rather than just a mere bazooka.

However, geopolitical tensions have raised their head again and may temper any irrational exuberance today, evidenced by US markets shedding ground in the afternoon and Asian markets dipping into the red. Claims of Russian military incursions into the Ukraine continue and now President Petro Poroshenko has raised instability by dissolving parliament and calling early elections. Also, concerns that the West is being drawn into a wider Middle East conflict are stirring with reports that the US will send reconnaissance flight over Syria, possibly laying the path for air strikes. If that wasn’t enough, it appears that Egypt and the UAE have taken the initiative and been bombing extremist in Libya to the West’s dismay.

Comments made by Mario Draghi fuelled speculation that ECB is getting ready to use quantitative easing which in turn bolstered confidence in the global markets. As a result the US equities posted a sharp rally with S&P reaching 2000 mark for the first time ever. At the same time, the Dow Jones gained 66 points to 17,078 also on the back of strong corporate dealmaking.

While the European Central bank signalled fresh stimulus measures to spur economic growth, the Fed is expected to raise rates sometimes in 2015. This divergence continues to weigh on the EUR/USD pair which yesterday slumped below the 1.32 level closing at 11 month low of 1.3192. It seems the greenback remains strong especially when the US economy expanded more than anticipated last month.

The US crude oil prices lost 13 cents to $93.34 on the back of another display of strength for the dollar. Oil production remains robust and motorist across the country enjoy cheap gasoline at the pumps. Undoubtedly one reason for the increase in output is the shale boom currently underway across the Atlantic.

Dollar strength also put downside pressure on gold prices which lost $4.9 to $1277.2 yesterday. In addition, talks of Fed raising the cost of borrowing next year reduced demand for the precious metal as an alternative asset.