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UK stock market commentary (February 05, 2013): Stocks already on the rebound following yesterday's declines

The reemergence of eurozone worries sent shivers down investors’ spines yesterday as the sellers cascaded into equity markets driving them lower following a spike in borrowing costs for the likes of Spain and Italy. There are no prizes for guessing what the markets think of the political uncertainty in the two countries as a change at the top in Spain could mean a drastic turnaround in the efforts to sort out their fiscal problems and for Italy a return of the charismatic Silvio Berlusconi, with promises of tax hand outs left right and centre, does little to inspire confidence in the country being able to address its own considerable debts.

As is often the case with big falls in equity markets there’s a fear that trying to catch a falling knife is a fool’s game and it’s best to stand on the sidelines waiting to see if there’s another big lurch lower in the coming days that might present a better entry or re-entry level. So far this morning the FTSE is behaving as if that entry level is here as it bounces on the open and stronger than our initial opening calls. Perhaps investors feel that the sell off was so sharp in what has up until now been a strong uptrend so far this year, that it was unwarranted and that it’s time to fill their boots again.

All markets were affected by the increase in political uncertainty yesterday that has always been lurking in the background anyway but Spain, with the calls for the resignation of Prime Minister Mariano Rajoy over alleged illegal payments, was never expected to be one of the contributors to such uncertainty. As a result the focus shifted back onto Europe and the threat it represents to the global economic recovery. Considering also the gains seen so far for the US equities, investors considered it’s safe to book some of the profits and as such they pushed the Dow 130 points lower to 13,880 yesterday.

There was little data out yesterday and today things become a bit busier with the UK services PMI due at 9.30 London time. This is an important survey due to the services sector making up the lion’s share of UK GDP and the last reading saw a big and unexpected drop below 50 suggesting contraction. This morning could see it get back towards that 50 level if not back into expansion territory but that’s unlikely considering the tough weather conditions that we’ve had in the last month.

As mentioned the FTSE is on the rebound this morning and at the time of writing it’s at 6270. Interestingly we would usually expect to see clients dipping their toes back in and buying the index following such a sharp decline, but we’ve not seen that this time round with the balance still being tipped towards the bears.

Of course the political risk in Spain where the Prime Minister stands accused of illegal cash payments but also in Italy ahead of fast approaching general elections, showed how thin the recent optimistic mood is. Investors did not think twice but rushed into the dollar pushing the euro 139 pips down to 1.3512. But this morning the buyers are back and pushing EUR/USD to 1.3510 at the time of writing. Later in the week the European Central Bank will announce its benchmark interest rate followed by the usual Press Conference.

Investors are still waiting for the catalyst that will cause gold to break out of the $1660-1680 range that it's been trapped in since last week. The precious metal closed $6.7 bucks up at $1674 yesterday. Momentum is seemingly running out after a twelve year rally and people are eager to look at any new figures emerging from the US that will give a further indication of the health of the world's largest economy and more importantly whether quantitative easing will continue. Loose monetary policy was a key driver in gold's rally over the past few years and many are concerned that an improving US economy will discourage the Fed from continuing with its current bond buying plans.

Crude prices followed equities lower yesterday, losing $1.58 to $96.08 a barrel with extra downside pressure coming from a rebounding US dollar. It was the uncertainty regarding the European political arena that made headlines, reminding everyone the sovereign risk from this side of the Atlantic is still present.