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UK stock market commentary (January 03, 2013): Profit taking for FTSE as clients sell into strength

The FTSE yesterday didn’t find the 6000 level too much of a stumbling block as it broke through and finally found the momentum to take itself back above the psychological level which had proved so tough throughout 2012. We haven’t seen a 6 in front of the FTSE 100 since May 2011 and whilst there’s no guarantee that it might remain there the momentum looks to be with the bulls for now. Clients have naturally opposed the breakout by selling into the strength and new resistance levels have been pegged in at the 6045 and 6105 levels. Support areas if they are tested could come in at the previous resistance so around 5985/65 and 5900.

It’s not just the recent deal on the US fiscal cliff that has got investors excited and diving back into equities getting the New Year off to a flyer, but the recent economic data has also looked encouraging. Not that our manufacturing sector is the engine behind global growth but yesterday’s latest manufacturing PMI survey was encouraging as it jumped back above the 50.0 level into expansion territory, which was higher than expectations. Today’s construction PMI survey may just as a result post a better than expected figure and it too could claw itself back into expansion. It’s not just the UK either as Chinese manufacturing and non-manufacturing data has commenced the year in good form.

But we can’t go straight up in a straight line forever and this morning sees a little bit of profit taking in the FTSE as the index is drifting lower to 6020 at the time of writing. There are still many headwinds that financial markets face in the year ahead not least the US’s fiscal woes which are by no means over. As mentioned in yesterday’s comment the can has been kicked down the road for now but in a couple of months more negotiations on the debt ceiling and spending cuts will be required. On top of this many banks remain in a perilous position and are stuffed full of toxic assets which is why they continue to be so reluctant to lend. Another banking crisis would mean all bets are off and not even a deal on US debt would be enough to save the global economy or equity markets if that situation arose.

As mentioned there’s plenty of economic data today with not only the UK construction PMI survey but mortgage approvals and consumer credit figures this morning. There’s also the ADP private payrolls from the US and then the FOMC minutes tonight.

The euro opened around 100 pips higher against the greenback at 1.3293 following the budget deal agreed by the US politicians after a long stalemate. But after averting the so called fiscal cliff, the next question ‘what now?’ reduced the initial enthusiasm especially when the debate on spending cuts was left for another day. In the end the euro lost 108 pips for the day to 1.3185 and is still under pressure this early morning with EUR/USD trading at 1.3150 at the time of writing. Several failures at the 1.3300 level seems to have brought a few single currency bears out looking to cap gains.

Gold closed up at $1685.7 yesterday and this morning it continues to hold up at a two week high as the dreaded fiscal cliff was headed off by a deal at last yesterday. Congress has spoken, commodity markets have been sparked into moving, traders are reacting and even though challenges for the world's largest economy remain, in the meantime governments around the world have risen their demand for the precious metal as a store of value. Gold rose by around 7 percent in 2012 ending a twelfth straight year on the up and many think that this good run can continue into 2013 supported by global policy maker's decisions.

The risk on sentiment also spilled into the energy complex yesterday pushing crude oil prices 43 cents up to $92.84 a barrel. Technically we had a bullish signal as the 9 day moving averages crossed above the 40 day moving average however, some light profit taking is already under way with all the attention shifting on the US employment report due this Friday.