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UK stock market commentary (February 28, 2013): Central bankers to the rescue

Central banks are back to the rescue as Federal Reserve Chairman Ben Bernanke made his commitment clear to keep the money presses going until unemployment in the US has declined. US stocks soared last night and that’s put a spring in the step of European investors this morning. No Italian elections can get in the way of or dent the resolve of the central bankers it would seem, who remain ready to act in order to support their economies and currencies.

Yesterday was also another good day for US economic data which supported the bulls’ case. There was better than expected US housing data which saw pending home sales rise 4.5% versus expectations for 1.7% increase boosting ongoing optimism the world’s largest economy is on the right track, on top of this core durable goods orders also surprised to the upside accentuating the daily rally. All in all it allowed the Dow to smash back above the 14,000 adding another 175 points to close at 14,075, even touching above 14,100 at one point.

Whilst our earlier call on the FTSE had been for it to open even higher it is putting in an impressive start to the day up some 30 points to 6355. The recovery from the Italian election sell off has caught quite a few off guard as some clients had been expecting further declines. For those bears out there it’s almost becoming a case of “if you can’t beat them, join them” and those investors that have been waiting on the sidelines for a larger sell off before committing might just throw in the towel and jump on board now.

On the economic data front it’s going to be another US focused day with the weekly jobless numbers, GDP and the Chicago PMI. The US figures have regularly impressed to the upside of late, yet another reason for investors to get bullish.

A much awaited bond auction in Italy was relatively well received by the markets which in turn eased some of the early concerns regarding the political turmoil engulfing the country. Currency investors were also encouraged by the Fed Chairman Ben Bernanke’s comments that defended his monetary policy thus spurring renewed demand for the shared currency against the greenback. So, the EUR/USD pair enjoyed a rally yesterday, recouping 76 pips to 1.3138 which is roughly where it remains today.

Gold closed at $1596.1, dropping by $18.4 bucks yesterday as it lost some its safe haven sparkle after investors realised they may have overreacted to Ben Bernanke's reassurance on the central banks monetary easing measures. As the world's largest global economy continues to improve, the precious metal is headed for its longest run of monthly drops in sixteen years as people are attracted to riskier assets such as equities. Traditionally gold is bought as a hedge against inflation which monetary easing could aggravate but upbeat economic data is making investors think twice before buying into it, and a weaker dollar is also adding downward price pressure. Now investors are closely watching the fiscal situation in the states as 'sequester' approaches on Friday when spending cuts will automatically be made to government programmes barring any last-minute deal by the law makers.

Growing confidence the US economic recovery is under way ,as shown by the impressive results seen in the housing data lately, failed to trigger a meaningful comeback in the WTI crude prices. A slight comeback of just 12 cents to $92.80 was not at all impressive if one also considers the failed talks between World Powers and Iran.