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UK stock market commentary (March 20, 2013): Will it be third time lucky for Chancellor and his Budget?

It’s Budget day and the Chancellor will have sharpened not only his pencil, but his axe as well. Whilst the headlines of further cuts may not make for great reading they are becoming more of a necessity to reduce the size of the state and to have some sort chance of keeping the confidence of the markets and ensuring the fiscal targets are met. At the same time the difficult balancing act of trying to spur growth remains a significant challenge and some of the measures leaked so far barely touch the sides in terms of radicality. A couple of billion expected to go back into capital expenditure looks like far too little, too late when considering the size of what capital expenditure used to be. The newswires are readying everyone for a grim budget and maybe this is the sort of build up the Chancellor needs to try and under promise and over deliver. His past Budgets have been nothing other than a PR disaster with leaks ahead of them promising renewed growth measures, however the headlines afterwards focusing on granny and pasty taxes. Maybe, just maybe this time with the prospect of a grim Budget, we might just see an inspiring one - wishful thinking many might say!

Yesterday saw a mixed session both in Europe and across the pond as the focus remains on Cyprus. The Cypriot banking crisis showed the US economy is not yet insulated from a renewed European debt struggle despite the latest bout of better than expected economic data. The Dow Jones ended flat at 14,455 discarding the ongoing rebound in the construction sector where the building permits data surpassed estimates.

This morning the FTSE seems to be defying gravity as earlier we were calling the index to commence the session flat around 6440, but already at the open we’re up 30 odd points to 6470. Many would have thought that the vote rejection by the Cypriot parliament last night and extension of the closure of its banks would have sent investors to the hills and peripheral borrowing costs soaring, but that simply hasn’t happened. Clients however remain overall short of the FTSE probably thinking that contagion will creep through to the likes Spain and Italy. For now, that just doesn’t look to be the case.

Not only do we have the UK Budget today but there’s a great deal of economic data out with unemployment and the BOE minutes this morning. Then from the US this evening there the FOMC meeting, which could provide some volatility later on.

Shocking as it might seem for Brussels, the Cypriot parliament voted down the levy on bank deposits with the country’s Finance Minister handing his resignation as a result. The news sparked fresh concerns the banking crisis could spread within the wider euro area with a run on Cyprus banks the next immediate threat. Consequently, the euro resumed its slump versus the greenback, losing 72 pips to 1.2883 yesterday. So far this morning the surprising bounce in equities is leading to a bit of support for the euro as EUR/USD trades at 1.2900 at the time of writing.

Gold closed at $1612.1 yesterday, up $7.3 bucks and is holding steady this morning trading near a three week high after the Cypriot parliament rejected bailout terms involving a bank levy. Investors have flocked to safe-haven gold in light of this new euro zone crisis. However, some feel that this support for the precious metal may not last in the longer term as Cyprus is a relatively smaller problem compared to past issues concerning other eurozone countries like Greece. Downward pressure for gold comes in the form attractive riskier assets like equities in an improving global economy and buyers are cautious ahead of a Fed meeting on Wednesday that could result in the tightening of monetary policy.

Following Cypriot rejection of a tax imposed on bank deposits, the global markets went into a risk off mood and energy sector was definitely no stranger to that. The WTI crude prices dropped $1.85 to $92.33 with the sharp selloff accentuated by a rush into the safety of the US dollar. The FOMC meeting together with weekly crude inventories are also likely to determine the short term direction..