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UK stock market commentary (February 25, 2013): What does losing the "Triple A" mean for the UK?

For a couple of few years now the markets have been holding onto the premise that the UK is getting to grips with is debts and meaningfully bringing down the deficit however last Friday the Chancellor got his first official slap on the wrist from credit ratings agency Moody’s in the form of a downgrade. The news is by no means unexpected and sterling naturally has weakened over the week end and this morning but not by as much as many would expect and that’s purely because we’ve already seen our currency plummet in the run up to the announcement which was rumoured to have been imminent days if not weeks ahead of last Friday.

As mentioned the Great British pound has been propped up by the belief that the deficit reduction plans were working and addressing our debt mountain, however since the Chancellor’s Autumn statement in December sterling has been gradually in decline as it became more and more obvious that the lack of growth was making his targets unachievable.

There’s been plenty of debating as to what the Chancellor should and shouldn’t have done as part of his plans and the economic situation really hasn’t helped, a situation that has been difficult to control due to the effect that our neighbours have had on us. But if Gorgeous George was to listen to the majority then he might have been better off leaving the tax hikes for another day and cut back the state more vigourously than he has done to now. Unfortunately, politicians only think about one thing and that’s being reelected so his plans have been to impose the direct pain on voters first, with a rise in VAT and other taxes, before the wider cuts to government spending.

Whichever way you look at the downgrade it could make sterling weaken further and this ultimately will simply import more inflation, something consumers and the economy could really do without at the moment.

On the other hand it should help our exporters and could give a boost to economic activity by making the goods we produce cheaper to the outside world and this is why we see the FTSE heading higher this morning. The index is rallying higher to 6375 at the time of writing so not far now off the 6400 level again.

A better than forecast reading in the German business confidence was largely the driver for changing investors’ sentiment back on the optimistic side. That allowed the Dow Jones a recovery of 101 points to 14,000 on Friday with additional support coming from another set of US corporate results exceeding the initial estimates.

Amid reports showing the manufacturing and services in the common area declined faster than previously thought, the euro finished rather flat around 1.3184. With Italy voting this weekend, the first time since the credit crisis, investors were not in the mood of betting too much and that could be because although there was no clear favourite, Berlusconi’s come back on the EU political arena was not well received.

Gold closed at $1579.6 on Friday and is continuing its rebound after bargain hunters have come back to the market. Last week it hit a 7-month low descending to $1554.2 minutes after a Fed policy meeting caused concern that the central bank in the world’s largest economy might stop or slow its multi-billion dollar bond buying program. Lately the precious metal has also been under pressure due to an improving global economy that has tempted investors to pile into riskier assets and this morning its holding steady as many are exercising caution during an unpredictable election and its impact on the euro.

Following a surprise rise to 10 month high in the German business confidence the equities markets received a boost which easily spilled over into the energy complex. Consequently, the WTI crude prices had the chance to recoup some of the previously two days’ heavy losses, although it managed just 27 cents climb to $93.39.