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UK stock market commentary (January 02, 2013): 2013 starts with a buying frenzy of risk assets

US politicians finally managed to carve out a deal at the last minute to avoid the fiscal cliff so that we will start the New Year on a slightly firmer footing. Most expected something to be agreed and so there were no surprises that negotiations went down the the wire as we’ve seen it all before when the fiscal cliff was first created back in 2011 following the debt ceiling tooing and froing. There will be relief from many that the world’s biggest economy will not suffer from the sharp tax rises and deep spending cuts that were due to be imposed as of the beginning of the year and this has allowed the threat of any possible recession to be brushed aside. Unsurprisingly, risk assets are in demand this morning as investors dive back into equities following this deal and at the open the FTSE has jumped back to the highs it was testing in the middle of December last year as it trades up some 80 points to 5980 at the time of writing. Everything is being bought this morning from defensives to more cyclical stocks so there’s a bit of a buying frenzy going on and it will be interesting to see if the index can finally close above its 2012 closing high of 5965.

The problem is that all the US has managed to do is take a leaf out of the European’s books by kicking the can down the road. Spending cut delays for a couple of months means that more negotiations will take place in only a few weeks time and we will have to go over the same old ground again. Having spent a good deal of the past few years telling others on this side of the Atlantic that they have to sort out their fiscal difficulties, the US has not practiced what it’s been preaching. The patchwork agreement made in the early hours of the New Year looks like it has set the tone for the remainder of this year which is likely to be dominated by not only a continuation of the eurozone crisis, but the US fiscal problems as well.

The New Year gets off to a busy start as the usual beginning of month economic data is released. Here in the UK the PMI manufacturing survey is released and is expected to stay at the same level of 49.1 as the month before, however there could be some downward pressure from new orders. Later on this afternoon we get the US’s ISM manufacturing which is expected to creep back above the 50 mark into expansion territory.

Later on this week of course we get the first non-farm payroll of 2013 this Friday. As mentioned the FTSE has jumped higher on the open this morning and there’s not even a handful of fallers within the index. It seems as though the buyers have the wind in their sails as this New Year gets underway and we’re within touching distance of the 6000 level.

Needless to say the risk on move this morning is to the US dollar’s detriment as the riskier currencies push higher across the board. The single currency is at 1.3280 at the time of writing and this move brings into focus the resistance levels seen around 1.3310, 1.3365 and 1.3415. To the downside support is seen at 1.3245, 1.3200 and 1.3170.

Gold begins the year strongly after rallying past $1680 today after closing at $1672.6 on the last day of 2012. The precious metal is at a two week high gaining with other commodities after Congress finally passed a bill that will avoid the $600 bn of tax hikes and spending cuts. The dollar weakened by around 0.4 per cent against a six currency-basket and gold supporting factors such as low interest rates and accommodative central bank policy are still in place. However, even though the US will avoid going over the fiscal cliff, as mentioned other budget talks lie ahead in the next two months and investors, particularly in Asia are watching to see how things will develop. The precious metal is at 1684 at the time of writing and support and resistance levels are seen at 1668/59/52 and 1694/1702 respectively.