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UK stock market commentary (March 07, 2013): Focus on BOE and ECB today

The focus will be on European central banks today with the Bank of England and the European Central Bank due to make their policy decisions. It’s the central banks around the world that have been propping global equity markets up and driving their rally so investors are almost happy and expect to see further gains if further easing comes their way. For the BOE there’s a real chance of a further £25 billion following some very dovish minutes from the last meeting where Governor Sir Mervyn had voted for more money printing and it will be interesting to see if he gets his way today. There are clear concerns within the MPC that inflation remains stubbornly high so there’s a chance that we may see no action at all and certainly that’s what the market is expecting. But it’s going to be a close one as we have seen a dramatic shift in focus by the BOE away from inflation and onto growth and since their view is that growth has been assisted by the BOE’s quantitative easing, there’s likely to be more either today or certainly before Sir Mervyn steps down this summer.

Over to the ECB there pressure has been continually mounting for a rate cut and “Super” Mario has been hinting about such a move, but been reluctant up to now to bring the benchmark down from 0.75% so that he’s still got a bit of ammo in store for if conditions worsen. Investors will be most interested in the Bank’s thoughts on growth and inflation forecasts for which are both expected to be reduced.

The ADP non-farm employment report in the US was better than expected, indicating better days ahead for the overall economy. In addition, in its Beige Book the Federal Reserve acknowledged a moderate economic growth mainly due to rising demand in housing and auto sectors. Consequently the Dow Jones edged higher, 21 points to 14,283. The euro resumed its plunge versus the US dollar yesterday, breaking and closing below the $1.30 level for the first time this year ending the session at 1.2991 with a 51 pips drop.

The euro zone’s economy slumped 0.6% in the last quarter, a record for almost four year which fuelled speculation of more stimulus from the ECB at its meeting later today.

Gold closed at $1584.2 yesterday, gaining $9.3 bucks and still trading within a narrow range. Investors are today keen to see what stance the major central banks will take on monetary policy to aid any weaknesses in their economies. Continued quantitative easing is seen to be good for gold as this causes concerns about the inflation level and people buy the precious metal to protect their wealth. A stronger dollar and the continued allure of riskier assets weighed on sentiment with a key resistance level lying at around the $1585 mark.

The US Department of Energy released its weekly crude inventories showing a bigger than expected build of 3.8 million barrels (vs estimates of 0.9 million barrels). That triggered renewed selling in WT with the market price losing 40 cents to $90.38. The non-farm payrolls figures due on Friday will be closely watched by energy investors with bulls hoping for some good news which could turn the current downside trend.