Reports » UK

UK stock market commentary (February 21, 2013): Fed nerves rattle markets

The Federal Reserve in the US dropped a bit of a bombshell on investors last night as it became clear from the minutes that they are as split as our own BOE however whilst the BOE looks like it is set to ramp up quantitative easing, the Fed is already looking ahead to the exit. It was also the uncertainties that were thrown up by the meetings’ minutes and the talk that the quantitative easing being undertaken by the Fed could lead to financial instability. Lack of stability is certainly something that investors do not want to hear and as a result the Dow sold off late in its session. It wasn’t only the equity markets that saw volatility either as the bond markets saw some sharp moves with traders scrambling for position attempting to work out what the minutes actually meant for the future of the QE program and interest rate in the US.

So a triple digit loss for the Dow taking it to 13,927 has meant that European indices are very much in the red this morning with the FTSE off by some 40 points at the time of writing taking the index to 6355. Having hit the 6400 level but failed to close above it, the index has pegged in the next target for the bulls and it will be interesting to see if this sell off will be as short lived as previous ones. Certainly those clients who have been selling in recent days opposing the strength will be breathing a big sigh of relief.

The economic calendar is quite busy today and already we’ve seen some French manufacturing data come in flat and German figures are due for release imminently. Then the UK PSNB is released and over lunch US CPI data, along with some housing numbers and the Phili Fed to round things off. Investors were caught on the wrong foot yesterday by the minutes of the last Fed meeting which showed different opinions on the exit strategy. That spurred demand for the US dollar as a safe heaven and in turn hurt the shared currency together with the equity markets. The EUR/USD pair slumped 119 pips to 1.3270 as the short term trend just turned bearish. This morning that bearish trend is continuing as EUR/USD trades at 1.3250 at the time of writing.

The decline in gold prices gathered pace yesterday with the precious metal losing $40.4 to reach $1563.4. A drop below the $1600.00 mark attracted additional sellers with a stronger dollar playing its bearish part. It seems gold is so much out of favour that not even a disagreement among policy makers could trigger a price recovery. After all, those Fed members who called for a sooner reverse in the QE might have thought about inflation.

A rebounding greenback and weaker equities drove oil prices lower yesterday as the WTI crude prices tumbled $2.46 to close at $94.60. There were also reports of widespread rumours that a fund is liquidating its long positions. The US Department of Energy will release its weekly inventories report today, a day later than usual due to the Presidents Day holiday.