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UK stock market commentary (January 28, 2013): Halfway through a lost decade?

Markets are starting what will be a very busy week for both corporate earnings and economic data releases and a mildly cautious note having previously been expected to open higher. The equity market rally remains in rather a bullish upward trend and any moves to the downside continue to be short lived with even the consolidation phase that the German Dax went through during the middle part of January turning into a spike higher last Friday.

All this bullishness comes at a time when headlines still make for tough reading. It’s reports of the never ending consumer squeeze this morning that many people going to work are being presented with on some of the front pages and something that is expected to last for a number of years ahead. The UK is suffering from a Japanese style lost decade in terms of consumer spending and you only have to see the recent casualties of the high street to understand that we are simply not reaching for the plastic anymore and continuing to pay off debts rather than splashing out on something new and exciting. When we are spending most of us are trading down and finding new ways to save money which is playing into the hands of the sort of supermarkets that would normally not be considered an option by many people. Inflation remains above par and wage inflation isn’t keeping up as the pressure on disposable income continues.

The only good thing about all this is that if we are to suffer a lost decade from the time that the credit crunch commenced in 2007, we are now just over halfway through it! Not a particularly fulfilling thought and unfortunately it means that we are likely to see GDP continue to flat line just as last Friday’s Q4 move back into negative territory showed following the big jump in Q3.

Last Friday the Dow continued to rally reaching the strongest level since 2007 almost touching 13,900 on the back of renewed optimism about the health of the US economy with most of the companies reporting better than expected results. It was the sixth straight gain and with the bulk of earnings due this week if we continue to see good figures the upward momentum has a chance of being maintained.

As mentioned it is a very busy week with around a third of the S&P 500 having reported so far and some 20% due to report this week. There are also lots of PMI survey’s due, central bank interest rate decisions, consumer confidence data, a FOMC meeting and then the non-farms on Friday just to finish things off. The FTSE is taking things relatively in its stride being flat to negative around the 6280 level as investors take stock of the gains until now and are likely to wait for some of the earnings and data releases before deciding if the rally has more legs.

Higher than estimated readings regarding the German investors’ confidence pushed the euro 87 pips up against the US dollar to 1.3459. Although the tone at the World Economic Forum in Davos, Switzerland was somewhat cautious with many still pointing to ongoing structural problems in Europe, it seems investors are more interested on a short term outlook.

Gold closed at $1658.9 on Friday and is little changed today as it hovers at a two-week low hit in the previous session due to an improving global economy. This has taken the shine off gold's safe haven appeal as investor’s appetite for riskier assets increases in this climate of optimism. The precious metal dropped by around 1.5% last week, its sharpest weekly drop in a month. However, international bankers and finance ministers warned that even though the euro had been stabilised, the euro zone would take years to recover so in the longer term gold is still an attractive asset to many.

The WTI crude prices closed marginally higher on Friday at $96.00 as energy market participants remained optimistic about the US economy which in turn should see oil demand well supported. The fact there was no profit taking going into weekend after trading at four months high could be interpreted as showing strong confidence going forward.