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UK stock market commentary (October 02, 2012): Australian rate cut a warning for bulls

Here in the UK we would not normally look at interest rate decisions down under but overnight the Reserve Bank of Australia surprised the markets by cutting interest rates. The significance of the move is that it has taken analysts and economists by surprise at a time that the Australian economy is still booming. So far the antipodean economies have remained resilient in the face of the wider global malaise and if ever there was a safe haven over the last few years it has been Australia and New Zealand whose government bonds are still returning attractive yields. So when you get a surprise cut in interest rates it can come as a bit of a shock. Clearly from the central bank’s point of view the risks are too great to keep interest rates as high as they are when their biggest customer, China, is slowing faster than was hoped.

The move has knocked the Aussie dollar a little and whilst it cannot be attributed as the main driver behind this morning’s negative price action, it still remains an event that has got the bulls alarm bells’ ringing.

In the US yesterday a surprise piece of US economic data which showed a rather resilient manufacturing sector. Later on, Federal Reserve Chairman Ben Bernanke reiterated his pledge to use monetary stimulus beyond the point where it becomes clear the recovery is on the right track.  Despite all this the US markets could not hold onto earlier gains last night retreating from its highs after and the Dow put on some 80 points as opposed to the 150 point gain it had been recording earlier in the session. The move indicates once again the skittishness of investors and this morning we are seeing European indices in the red, although at the time of writing the FTSE has been clawing back some of the losses at the outset. The index is at 5810 and earlier we had been calling it to open around 5790 so those savvy clients that bought the FTSE this morning are sitting pretty for the time being.

Economic data is thin on the ground today but we do get UK PMI construction data which is expected to get itself back above the key 50 level suggesting expansion although it wouldn’t come as much of a surprise to see this disappoint since yesterday’s manufacturing number was so poor and construction in the UK remains in the doldrums.

Amid plenty of lingering questions regarding the Spanish request for a bailout the manufacturing reports on both sides of the Atlantic saved the day pushing the euro 34 pips up to 1.2885. Smaller than initially anticipated contractions in Spain and Italy discarded the late pessimism over the euro zone sending investors on a stand by till Thursday’s interest rate meeting by the European Central Bank. This morning the single currency is roughly flat against the greenback trading at 1.2890 at the time of writing.  Near term support and resistance is seen at 1.2840/00/1.2750 and 1.2985/1.3030 respectively.

Bargain hunters and a slightly weaker US dollar pushed gold prices higher yesterday $5.30 to $1777.00. The ongoing sovereign debt crisis in Europe and a US economy struggling to recover at a more meaningful pace are good enough reasons to support the precious metal for now.

A positive reading in the US factory activity kept energy investors optimistic the oil demand will remain supported. That allowed a 33 cents gain for the day to $92.48 but the thin trading range also suggest plenty of caution ahead of a few crucially important events towards the end of the week, the interest rate meetings by the Bank of England and the ECB combined with the US nonfarm payrolls.