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Reports UK

UK stock market commentary (July 04, 2014): Are the bulls about to go parabolic?

July 4, 2014, Friday, 09:44 GMT | 04:44 EST | 13:14 IST | 15:44 SGT
Contributed by Capital Spreads

A tepid start is expected for European equities as traders take stock after a solid performance in the prior session. The bulls have gotten up to a canter and the question is if they can pick up enough pace to stampede through some pretty solid resistance levels.

Yesterday’s events were an interesting display of selective interpretation. The good US jobs number were cheered on by the bulls as a sign that the real economy is starting (for the umpteenth time) to show signs of getting to take off speed, whilst completely shrugging off the fact that this firms up the like hood of a rate hike in Q1 2015. In Europe, as the economy jolts about around stall speed, it’s very weakness and the need to keep monetary policy loose for an extended period was a boon for the bulls.

Although economic performance and monetary policy around the globe is diverging, the fact that the bulls can still keep pumping markets up in unison is probably a sign that equities are still the only game in town worth playing.

The US nonfarm payrolls data released a day earlier due to Independence Day holiday indicated a rise of 288,000 jobs surpassing estimates for a 215,000 advance. At the same time the jobless rate fell to 6.1% in June. That sparked a rally in Dow Jones which topped 17,000 for the first time in intraday trading, closing 82 points up at 16,974.

A better than expected US employment report fuelled renewed speculation the Fed could hike interest rates sooner than anticipated. Consequently we had a rally in the greenback which in turn hit the shared currency especially after ECB President Mario Draghi reiterated his plans to keep rates low to revive economic growth. At the ECB policy meeting, the main refinancing rate was left unchanged at 0.15%. The EUR/USD pair dropped 47 pips to 1.3610.

The WTI crude prices fell for the fourth straight session, losing 19 cents to $104.09 a barrel following easing fears over oil supplies disruptions in Iraq and Syria. Islamist insurgency in the Middle East was largely the reason for the recent rally in crude, especially seen on June 12 but as output was not affected too much investors see no reason for that risk premium anymore.

Signs the US economy is staying the course and getting healthier brought troubles for the precious metals amid record highs for equities. Gold prices lost $7.9 to $1320.3 on heightened expectations that good news on the economic front will push the Fed to raise rates sooner.