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UK stock market commentary (February 01, 2013): Markets recover from losses

The pause for breath seems to to have been short lived as European markets are set to bounce following the two previous days of profit taking. With some slightly disappointing economic data and corporate earnings investors naturally halted the buying frenzy to just stand back for a while and review what has been a superb start to the year. It looks like this second month is going to start on the front foot as well so it will be interesting to see if the big figure of the day, namely the non farm payroll will give the bulls a boost to test the recent highs.

It really continues to be largely the US indices that are leading the way as the march towards their 2007 highs yet European markets are still lagging behind. This most likely represents the difference economically from the UK and the Continent and across the other side of the pond where growth is far more robust, so there are many people who argue that European stocks are still undervalued when compared to their US counterparts.

Yesterday the Dow edged lower by 50 points to 13,860 as mentioned investors in the US also stopped for a breather ahead of today’s non farm payrolls figures due at lunch time. It was a day when a few of the corporate earnings missed estimates which sparked second thoughts about the health of the US economy and so led to the profit taking, but already this morning we are calling the Dow to open higher by 40 points to 13,900 at the time of writing.

For the non farms today the unemployment rate is seen unchanged at 7.8% with employers expected to have added around 160,000 jobs last month. What will really be interesting is how the market will react to the data. We could see a spike higher if the data’s better than expected or if worse a spike lower could be met by buying as investors see bad news as an increased chance of further monetary stimulus.

So the FTSE is higher at the open and back above the 6300 level having erased all of yesterday’s declines already. Clients who had largely been short during the rise in the FTSE throughout January came out of those shorts in the couple of down days and a few tentative long positions have been taken out, timing the move rather well.

A surprise decline in the German unemployment fuelled renewed hopes the worst is over for the European economy which now gathered momentum in its recovery. That pushed the euro higher against the greenback ending the day 14 pips up at 1.3577. At the time of writing the shared currency has broken above the 1.3600 mark but the attention will undoubtedly shift on the other side of the pond as the reaction to the US employment figures will likely affect the world’s markets.

Fear of inflation is off the table for now which affected gold prices as a hedge. In addition there is an overall cautious optimism the worst might just be behind us which in turn pushed the equities to recent year highs. Yesterday, this sentiment put downward pressure on gold again which finished $12.00 down at $1663.2

Awaiting the US nonfarm payrolls data, energy investors took some profits off the table sending the WTI crude prices 56 cents down to $97.36 a barrel. However, the growing unrest in the Middle East and North Africa shows no sign of abating which should offer further support for now. Technically, the chart indicates a steady uptrend since mid December and one could ask if a negative surprise in the US employment might just interrupt that.