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UK stock market commentary (October 09, 2012): IMF growth downgrade puts "plan B" on agenda

The IMF’s downgrade to global growth is not what anyone would want to hear especially the coalition government who are insistent that they are sticking to the path of austerity. Following on from Gorgeous George’s speech yesterday that he’s not for turning we can expect more of the same from our Dave who is likely to reiterate the importance of not changing course when he makes his speech tomorrow. But what is surprising is that for a government that has made more U-turns that most can care to remember, for them a change of course on this issue is not an option for fear of being seen by the electorate as indecisive and weak. But people are used to seeing U-turns now and if a policy announcement is unpopular and needs a rethink then it shouldn’t be imposed upon people.

If global growth continues in this downward fashion and consequently knocks us into an even deeper recession than the bout of flat-lining growth we are currently enduring at the moment, this period of malaise for the UK economy may actually feel like boom time. Then the pressure really will be on for the coalition to change course and go down the route of plan B, but if plan B involves borrowing more to boost growth it will all have come too late, especially if the eurozone is in trouble, let alone the global economy.

Initially the FTSE had been higher in early trade as investors took the IMF downgrades to their growth forecasts as a sign that more stimulus from China was imminent. Asian stocks were boosted by the news and down under mining stocks were popular as copper prices rallied. It hasn’t taken long however for these gains to be reversed and we are now in the red by some 10 points to 5830.

Today marks the unofficial start of the third quarter earnings season in the US and investors seem to realise the debt levels are still elevated and economic uncertainty remains an issue. Yesterday, the Dow Jones lost a handful of points to finish at13,580 as the World Bank cut its forecast for Asian growth, but volumes were woefully thin as the US was on holiday for Columbus Day. At the time of writing we are calling the Dow to open 30 points lower at 13550 and so we will see if the return of traders to their desks across the pond can spur the US markets back into life.

In trying to address the sovereign debt crisis, the euro zone finance ministers met in Luxembourg but they refused to give in to any speculation about a Spanish request for financial help. That unsettled the markets a bit and the euro declined 55 pips versus the US dollar to close at 1.2966. As I write the ECB president is speaking on the European economy and the single currency is taking a bit of a dive with EUR/USD trading at 1.2935 at the time of writing. There is also a focus on Athens today where the German Chancellor Angela Merkel will pay a visit to Greek Prime Minister Antonio Samaras, who is desperate to adjust their fiscal targets which are woefully off track.

Gold closed down for its second consecutive day by just over five bucks from where it was on Friday at $1775.3. Concerns over global growth and the eurozone debt crisis could weigh on the precious metal as these worries keep the dollar strong. The precious metal is defensive at the moment but, its speculative interest is still up there as previous stimulus measures by the largest central banks in September make it an attractive hedge against inflation. Physical demand has been kept low but if the price continues to dip it could perk up and some say hit the $1800 mark by the end of the year.

We saw a down day in crude trading yesterday as the WTI prices lost 52 cents to $89.33 a barrel largely on a slightly stronger US dollar. But what made headlines was the widening of the WTI – Brent differential which moved just below $23.00 level, close to one year high. The short term trend remains bearish as so far the abundance of supplies restricted any upward push.