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UK stock market commentary (December 12, 2012): Markets continue Christmas rally despite headwinds

December 12, 2012, Wednesday, 09:25 GMT | 05:25 EST | 14:55 IST | 17:25 SGT
Contributed by Capital Spreads

Discussions over the US fiscal cliff continue without a resolution but investors appeared rather optimistic about the progress in the talks between US President Barack Obama and Republican John Boehner which have made headlines for more than a month now. As a result, the Dow Jones had enough reason to continue its rally, gaining 80 points to 13,250. The markets continue to edge higher as they brush aside the developments in Italy and the political uncertainty that has arisen from the resignation of technocrat Prime Minister Mario Monti. A missile launch by North Korea has also not done much to dent investor sentiment as bit by bit the indices seem to be building a Christmas rally especially the German Dax which continues to knock on the door of its 5 year high. The Dax was assisted somewhat by the additional encouragement of the ZEW survey that showed investor and economic sentiment confidence in Germany stayed strong. The FTSE is lagging its European counterpart and the in terms of the US indices the Dow remains a few hundred points from its year’s highs.

Clients remain of the view that the FTSE will be unable to sustain these highs though as they continue to sell into the strength expecting the Christmas rally to take a pause for breath and even a correction to the downside. That certainly seems to be a view that is against the current trend and a brave one considering the time of year but since the FTSE can’t seem to convincingly break above this near term resistance area around the 5925 level it’s no wonder we see so many sellers at this moment in time.

There’s lots to focus on in terms of economic data today as we kick off with UK unemployment figures. The claimant count last month rose for the first time for quite a while and is expected to do so again today as the effect on temporary employment from the Olympics fizzles out. The UK labour market continues to surprise many economists and has been remarkably resilient considering the sluggish growth we’ve seen this year. Even though growth is expected to improve in 2013 the level of employment may struggle to keep up with it.

Later this evening we get the FOMC decision (not last night as mentioned in my Market Wrap yesterday!) and this will be closely watched to see not only what Ben Bernanke will announce to replace Operation Twist which comes to an end in the New Year, but what his growth projections are for the US economy. Of course (as mentioned in my Wrap yesterday) investors will also want to hear what he has to say about the looming fiscal cliff.

So the FTSE is treading water at the moment trading at 5925 and the bulls will be watching those near term resistance levels of 5955/85/6000 closely.

As mentioned the ZEW survey in Germany pointed to a climb in investor confidence thus attracting demand for the common currency. At the same time, there has been some growing anticipation the Fed is poised to further ease its monetary policy which fuelled a risk on approach in the last few sessions. So, the euro saw another gain versus the greenback to 1.3003 up 60 pips for the day and this morning is just about clinging onto the 1.3000 level at 1.3010.

Gold was hit slightly by profit taking ahead of widely expected Fed meeting after a few positive sessions. It was a decline of just $2.2 to $1710.2 suggesting participants are keen to find out the details of a possible monetary expansion before committing any further. A weaker greenback probably helped limiting the slide.

It looked that OPEC was in no mood of changing the output target for crude oil from the current levels even expressing views that supply and demand are quite balanced. That was not an incentive for crude investors to jump in ahead of Fed meeting or the weekly inventories report. Little surprise to see WTI prices closing near flat at $85.71.