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UK stock market commentary (January 16, 2013): Bears leading the market lower, but will bigger sell off come?

The FTSE continues to hover around its highs and this consolidation phase is leading to sentiment becoming a little more uncertain, despite another little creep higher from US stocks yesterday. Following the good run that equities have had so far investors are pausing for thought as they weigh up the risks and those risks remain very palpable considering that around the corner the US debt ceiling problem will have to be addressed and the fiscal cliff can that was kicked down the road will also have to deal with spending cuts. Politicians across the pond have already been flexing their muscles over the debt ceiling issue and it looks like these first few squabbles are likely to be the prelude to something bigger that will unsettle the markets even further.

Despite the political as well as economic risks that investors face equity markets remain under pinned by the free flow of monetary stimulus created by central banks. The new Japanese Prime Minister is a huge advocate of further stimulus from the Bank of Japan in order to stoke inflation and try to turn the ailing economy around which has lifted the Nikkei to its highest level since May 2010, although last night there was a sharp correction to the downside marking its largest daily fall in eight months. Investors, in particular those in Asia, are looking ahead to Friday’s Chinese economic figures that could be the catalyst to the next leg upwards if the retails sales, industrial production and GDP figures show the recovery of the world’s second largest economy is well on track.

Across the pond yesterday as mentioned the Dow crept higher once again by some 25 points to 13,535 reversing earlier losses following better than expected results for December retail sales. At the same time the banking sector was also in demand amid optimism regarding its earnings which is thought to be turning the corner after a few difficult years. But this gain was only meagre and was not enough to push Asian stocks higher overnight and this morning European indices are in the red. The FTSE 100 continues to find support around the 6100 area and even though it dipped below this level yesterday the follow through from the bears hasn’t materialised and so the consolidation continues.

There’s a bit to focus on from an economic data point of view with US inflation and industrial production figures due out around lunch London time and then the NAHB housing market index this afternoon.

Not the best of timing in Luxembourg Prime Minister Jean Claude Juncker’s comments yesterday who said the shared currency is ‘dangerously high’ after touching recent records versus the dollar. What followed was a 72 pips decline to 1.3312 thus interrupting a three days rally. Worries that Germany, Europe’s biggest economy is now struggling has added another pessimistic touch accentuating the selloff and this morning the risk off appetite is just affecting the single currency as it is down to 1.3285 at the time of writing this morning.

With the economic growth forecast being negatively readjusted by the World Bank, investors are now speculating that a stimulus cut could be premature. That bode well for gold as a store of value asset which has seen its price gain $11.8 to $1679.3. It appears that $1680.00 was a resistance level since mid December so bulls will want to put that to rest and really push for a more meaningful rebound.

The WTI crude prices tumbled 76 cents to $93.40 yesterday on the back of estimates of a build in oil inventories amid a cut in growth forecast by the World Bank. A stronger greenback was also an incentive to go short crude. Later today the US Department of Energy will release its weekly stockpiles report confirming or discarding the earlier concerns.