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Reports UK

UK stock market commentary (August 27, 2014): Once bitten, twice shy

August 27, 2014, Wednesday, 05:31 GMT | 00:31 EST | 09:01 IST | 11:31 SGT
Contributed by Capital Spreads

European equities are set to open modestly lower as the bulls take a small breather. However, the bulls remain firmly in control as they believe they have Draghi in their corner warming up the printing presses. Unlike the US markets, the major European indices are a fair distance from their all time highs, but with Draghi apparently about to provide the ultimate economic backstop, traders have got something to initially aim for.

The economic data out of Europe certainly warrants some super stimulus and it has certainly been encouraging for the bulls that Draghi acknowledges the fact, but could they be getting way ahead of themselves? Remember this is a man that has being saying he will do whatever it takes for just over 2 years and southern Europeans aren’t exactly known for the sense of urgency. There’s an impression that printed money will be entering the system imminently, but if the difference in timing between the ECB and markets over quantitative easing, or if this turns about to be another ‘verbal easing bluff’; then we could see markets turn sour on the whole affair.

A massive jump in the durable goods orders surpassing three times the estimates undoubtedly sparked a sharp rise in the US equities. Shortly after, consumer confidence data also came in stronger than expected thus accelerating the rally. So, the Dow Jones continued its advance reaching a fresh all time high intraday and closing 50 points higher at 17,122.5.

The shared currency shows no sign of stopping from its slump versus the US dollar since the ECB appeared to concede in its abstinence of using QE. Investors are now increasing bets that monetary stimulus will become official on this side of the Atlantic whilst the Fed could move towards interest rates hikes. And those are the ingredients for ongoing greenback strength which yesterday gained another 25 pips against the euro to 1.3167.

Optimism over the state of the US economy easily spilled over into the energy complex pushing the US crude prices 46 cents up to $93.82 a barrel. The US economic recovery seems to be gathering pace so demand for energy should also pick up thus counterbalancing al that oversupply which triggered a price decline lately.

Tension in Middle East and Ukraine fuelled demand for gold as a safe haven in the early trading yesterday pushing its price to an intraday high of $1290.8. However, a stronger dollar took its toll later on as the precious metal gave back most of its gains but still managed to close $4.0 higher at $1280.4.