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UK stock market commentary (October 04, 2012): All eyes on BOE and ECB

It is central bank day here in Europe as the BOE and ECB announce their latest monetary policies around lunchtime.  So far this week the economic data that’s come out of Europe has not been particularly encouraging but across the pond on the other hand, where Americans got their first chance to see both Presidential candidates go head to head in their live television debate, there’s been some encouraging news on the numbers front.  Yesterday’s ADP private payrolls figure was much better than expected and the services data also came in much higher than expectations.  This compliments the recent stronger consumer confidence which to the US economy is a critical part.  Tomorrow will see the non-farm payroll data which is expected to post a triple digit gain so for now, despite a downward revised GDP figure just recently, things in the world’s largest economy as in good shape as the Presidential candidates gear up for next month’s elections.

Here in Europe on the other hand things are less rosy.  The manufacturing and services data has been dire to say the least.  Only the UK’s PMI services survey is above the 50 mark with even German reporting a surprise contraction yesterday with a figure of 49.7.  So even though the central banks here are doing what they believe is enough to try and boost growth it simply doesn’t seem to be working.  The UK’s funding for lending scheme has got off to a bad start with the recent credit and mortgage data pointing to a woefully low amount of new loans.

Unfortunately we cannot expect anything from the BOE and ECB today as it’s highly unlikely the BOE will cut rates, at least at this month’s meeting and they won’t want to expand their asset purchasing program for now until they’ve seen the first release of Q3 GDP.  For the ECB we can expect more rhetoric in terms of Mr Draghi saying he has done his part and it is now up to governments to do their bit, in other words if they want to benefit from his OMT bond buying program, they have to be part of the EFSF/ESM program.  There will no doubt be lots of questions for the President at the press conference regarding the legal wrangling and talk of yet another restructuring of Greek debt so it will be interesting to get super Mario’s take on these important issues.  Whilst some expect another rate cut from the ECB, it is unlikely to be today.

European indices have started in decent fashion although at the time of writing they are retreating from their highs a little.  The FTSE is trading at 5830 at the time of writing up a mere 5 points and clients remain on the whole bullish of the index, but not by much.  Meanwhile they remain heavily bearish of US indices continuing to sell each time the Dow ticks higher.

Awaiting the European Central Bank decision on its benchmark interest rate followed by the press conference, investors decided to stay on the sidelines.  No surprise, the euro moved only marginally lower, 5 pips to 1.2908 with the daily range being also very thin.  In addition, participants want to see a clear signal that Spain intends to ask for a bailout before committing any further.

In muted display, going nowhere for most of the day, gold managed a $4.50 gain to $1777.35.  On one hand growing uncertainty regarding the global economic outlook (even China shows signs of stuttering) keeps the precious metal well supported.  But on the other hand, the US dollar appears to be favoured as a better safe haven hedge at the moment.

Defying an escalation in the Middle East conflicts, the WTI crude prices posted a sharp sell off yesterday, losing $3.50 to $88.14.  The trigger behind it was a sign that China’s expansion is losing steam, faster than previously anticipated.  With Europe still mired in debt troubles and the oil demand in the US struggling to keep up with an overall rising supply, energy investors seem to be losing patience.