Reports » UK

UK stock market commentary (January 07, 2013): Investors return, can FTSE sustain these levels?

As we commence the first full working week of 2013 equities have got off to a stellar start following the US fiscal deal last week and as investors and traders return in earnest to their desks it will be interesting to see if the strength we’ve seen so far can be maintained. The days ahead will be a test to see if the return of some volume will keep indices at these elevated levels. Whilst there maybe many investors willing to increase their exposure to the riskier assets such as equities, the FTSE is up over 3% already in 2013, there are still plenty of concerns over just how this year will pan out.

The UK itself has been a hot topic of conversation in recent weeks especially following all the growth downgrades at the end of 2012. So far in this year equities may have impressed but UK gilts have been heading in the opposite direction which has led to a spike in the government’s borrowing costs. The likelihood of a downgrade to the UK’s credit rating this year has been heightened by these growth downgrades and the fact that Gorgeous George is going to have to borrow more this fiscal year. That increase in borrowing is also going to cost him more now that the yields have risen over the past week and he has already announced an extension to his austerity program. Without a decent spurt of growth the years ahead are going to be even harder to meet his fiscal targets and even the forecasts for the UK economy in 2013 now look rather ambitious following the dip in services activity below the 50 level in last week’s PMI survey suggested contraction in the sector.

A little bit of good news for banks however this morning as a minor victory for them in the form of a relaxation in the Basel banking rules have been agreed. This just loosens the noose somewhat and so banking stocks are filling the leader board on the open today whilst the FTSE 100 is only just in negative territory at 6080 as the week kicks off with some mild profit taking. There’s little in the way of economic data out today but things warm up as the week goes on with retail sales data and interest rate decisions from the BOE and ECB. The focus will be very much on retailers this week as we get Christmas trading updates from all the big supermarkets with Morrisons having opened the batting this morning announcing a drop in sales over the period although this hasn’t caused any selling pressure on their stock so far today.

Last Friday was the first US non farm payroll day of the year which was a bit of a non event in the end as the report showed an increase of 155,000 jobs last month, largely in line with expectations and failed to impress investors although it did add to speculation that the Fed might not be ready yet to stop the stimulus as announced the previous day so pushed the Dow a little higher with the index adding 40 points to 13,435.

Signs the US economy is recovering albeit at a slow pace shifted euro investors’ mood to risk-on after a two days’ drop. Business confidence in Germany, Europe’s biggest economy, rose which also helped overturn the previously bearish sentiment. Consequently, the euro posted a slight rebound against the dollar of 27 pips to 1.3080 but this morning the bears are back out driving the single currency towards 1.3000 as EUR/USD trades at 1.3020 at the time of writing.

And again gold was out of favour with investors as no surprise on the US economic recovery pushed participants out of precious metals into more risky assets. Gold lost another $6.9 on Friday to close at $1656.4 after reaching an intraday low of $1625.5. We can see some bargain hunting this morning but it remains to be seen if it can last.

The US employment figures were only marginally above estimates but enough to keep energy investors confident the demand for crude will stay well supported. Thus WTI prices continued their rise, gaining 22 cents to $93.04. The US Department of Energy released its weekly inventories report two days later than usual due to New Year’s Day holiday indicating a bigger than anticipated decline in crude stockpiles.