Reports » UK

UK stock market commentary (January 17, 2013): Clients remain bearish but others are very bullish

Little newsflow overnight but further weakness in Asia is just putting a little pressure on European equities this morning. Yesterday the FTSE dipped below the 6100 level and looked like it could be making a little break lower to the downside but it recovered late on in the session to close back above 6100. This jostling for position between the bulls and bears continues as the bears can’t seem to quite find enough collective momentum to pull the markets lower meanwhile the bulls await the next impetus to push us on our next leg higher.

Just a couple of nights ago I attended a presentation from a prominent asset manager whose Chief Investment Officer gave us his view on the equity markets over the coming years. To sum up he was very bullish of equities well into the future, in particular emerging markets, purely due to the central bank stimulus measures that are in place and set to continue. He did however give a stark warning that at some point the bull market will come to an end, possibly in around 5 to 7 years and whilst it came as no eureka moment to hear his prediction that the bull market will end at some point around then, he was sure that the resultant sell off will be as spectacular as some of the past significant equity market crashes. What was it that he believed will be the cause of this crash? Interestingly, his view was that it would be a considerable spike in inflation. All the stimulus in the run up to the crash will drive asset prices higher and fuel inflationary pressures to such a degree that rampant inflation would not only cause a crash of the equity markets, but the bond markets at the same time. It will be interesting to see if in 5 to 7 years time whether this mega crash does materialise.

Whilst this is a long term view you can see that in today’s market the moves to the downside remain limited to only a few points at a time. We saw throughout 2012 a couple of corrections to the downside but nothing that central banks couldn’t sort out and prevent from turning into a larger sell off and this is the situation we find ourselves in this year as well. It would seem that there needs to be a larger catalyst for the markets to really make a more forceful move to the downside.

So the weaker Asian session has filtered through to London this morning but we are only a handful of points in the red just below 6100. Clients that had been short took some profit yesterday on the dip to around the 6080 but the overall position remains short as they continue to expect a larger move to the downside.

As a result of disappointing numbers for exports, German government cut its forecast for 2013 signalling worries that Europe’s economic engine is losing steam. With election later in the year, it could become increasingly difficult for Chancellor Angela Merkel to give in to potential bailouts from euro area without alienating voters. Consequently, the shared currency dropped 25 pips to 1.3287 but stayed above the short term moving averages and this morning is hovering around the 1.3300 level.

Gold prices finished near flat around $1679.4 yesterday as the previously mentioned good resistance at $1680.00 did its job. Bullish investors will want another try to break out of the sideways range but will be aware that repetitive failures could attract another sell off towards $1640.00 mark.

A surprise drop in weekly oil inventories as reported by the US Department of Energy pushed the WTI crude prices 73 cents up yesterday to $94.14 a barrel. It has done that despite a rebound in the US dollar and a slight pullback in equities. Overnight though, oil price started on the defence as renewed concerns over the global growth with Europe again the main culprit took their toll.