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UK stock market commentary (February 22, 2013): Sell off on larger volumes, more to come?

Amazing what difference 24 hours makes. From the dizzy heights of 6400 to below 6300 in one session, as there were triple digit losses recorded by most European indices. Overall sentiment amongst investors seems to remain largely bullish and so the recent weakness could be perceived as a buying opportunity. We’ve seen that any pullbacks so far this year have been met by buying but all along the rally has not exactly been matched with substantial volumes. Yesterday’s decline however was on strong volumes and this is often seen as a technical sign that further weakness may be forthcoming. There are probably many bulls who’ve also been waiting for things to get a little cheaper before diving in and whilst yesterday’s fall was not insignificant, those people sitting on the sidelines may want a bit more to be given back before they dip their toes.

This morning however it looks like a few of those people are looking to dip their toes in already as, despite falling, the Dow recovered from its lows later on in its session and so at the open the FTSE is higher by some 20 points taking it back above the 6300 level. We will see if this strength can continue throughout the day and whether yesterday’s falls really have presented investors with another buying opportunity, but as mentioned throughout the past few days in various comments there are two important political events just around the corner. First, the Italian elections this weekend, which the markets seem to be very much unconcerned about at the moment, but all eyes will be on the result. Expectations are for a Bersani victory but there remains a risk that we could see a hung parliament and possibly even a return of septuagenarian Berlusconi. Second there’s the US sequester which has not received anywhere near as much coverage as the original fiscal cliff back at the end of 2012, but it probably warrants more of a focus as the opposing political parties in the US remain at logger heads.

On the economic data front today we’ve already seen the final German GDP reading which has come in at -0.6% as expected so no change or surprises there from previous readings. There’s also the German Ifo survey which if Monday’s ZEW is anything to go by could surprise to the upside even if it is already expected to come in higher.

Yesterday’s economic data in the euro area disappointed again as manufacturing and services PMIs dropped more than initially expected implying a faster pace in contraction. That doesn’t bode too well for the eurozone recovery and as a result the euro declined 91 pips, dropping below the 1.3200 mark for the first time in more than 6 weeks. The short term trend turned bearish indicated also by the crossing of the moving averages. This morning however the single currency is just about holding onto the 1.3200 level and near term support and resistance is seen at 1.3135 and 1.3255 respectively.

Somewhat overdue, gold rebounded slightly yesterday on bargain hunting, recovering $11.5 to $1575.8. It has done so in the face of a higher US dollar with investors realising the last few weeks’ optimism might have been overplayed as long as division among Fed members can spur a selloff. However, the sellers look firmly in control for now.

The release of the weekly stockpiles reports for crude oil by the US Department of Energy showed a bigger than estimated build in inventories, 4.1 million barrels compared with forecast of 1.9 million barrels. Consequently, the WTI crude prices fell $1.87 to close at $92.91 with the move accentuated by a strengthening greenback and a slump in equities.