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UK stock market commentary (October 10, 2012): Can our Dave inspire us?

More doom and gloom for the markets as the IMF weighs in and downgrades its forecasts for global growth. But don’t worry, at least we have our Dave’s speech to look forward to and inspire us! Unfortunately, it you are expecting any surprises that might allude to any give aways or radical measures to boost the economy you’ll be sorely disappointed and the IMF’s forecasts yesterday acts as a sharp reminder that all is not well not only in terms of the UK’s growth prospects, but for everyone else as well.

Is there any light at the end of the tunnel, and as commented yesterday should the coalition seriously be considering a plan B? The bottom line is that there simply has to be some readjustment and cutting back of the state across those economies that have gorged themselves on debt in the past decade or more, in particular in Europe. As stated by the ECB President yesterday it is going to be a long and hard road and there really is no alternative. The path to austerity has to be taken for now in order to repair the longer term prospects for growth and the temptation to borrow more to help boost growth over the short term has to be averted.

The light at the end of the tunnel is that growth in the third quarter is expected to have bounced back with predictions for Q3 GDP ranging between 0.1% and 0.9%. On top of this there is the new government Funding for Lending scheme which is expected to kick in properly this month as well as the FSA relaxing lending rules of UK banks. Even in France this morning industrial production has come in far higher at a whopping 1.5% when it was expected to post a decline of 0.3%.

The proof will be in the pudding but this might help to alleviate the lending squeeze on businesses and consumers. The only issue here is of course confidence is still at a desperately low ebb and it doesn’t really matter how much banks are being forced to lend, if businesses aren’t confident of their prospects over the next 6 months then they won’t be willing to take the risk and attempt to expand right now. This stalemate is what’s affecting the equity markets at the moment. Fundamentals are deteriorating yet investors remain happy to keep faith in equities due to the continued money printing by central banks.

Yesterday’s gloomy predictions sent the Dow Jones plunging with a triple digit loss taking it back below the 13,500 mark, but there was at least a bright spark from Alcoa after the close as it kicked off the earnings season with a rise in revenue. Unfortunately for them it’s a case of revenue is vanity and profit sanity as they reported a loss compared to profit in the same period last year, citing the ever slowing Chinese demand.

This morning the FTSE has done well so far to recover from our earlier negative calls as the index hovers around 5800, only in the red by 5 points, when before the open we had been calling it to fall by some 30 points. Near term support and resistance for the index is seen at 5780/65/35 and 5825/35/50 respectively.

We had a risk off day with investors rushing into the US dollar following a warning from the IMF that global economy will expand less than initially anticipated. At the same time violent street protests in Athens as German Chancellor Angela Merkel visited Greece reminded everyone that implementing austerity cuts is a painful affair and in some regions could become a social time bomb. Consequently, the euro lost 82 pips to 1.2883 and this morning is at 1.2870.

Gold prices declined for the third day in a row yesterday, dropping $12.55 to $1763.30 as participants were put on alert by a bleak prediction from the International Monetary Fund regarding the global economic outlook. Instead, the favourite choice was the greenback which attracted the safe haven demand.

The energy market chose to ignore warnings of ongoing downside risks for the global economy and posted a sharp rise in the WTI crude prices of $2.77 to $92.39. It appears the focus shifted back on troubles in the Middle East with rising fears of an escalation in the conflict between Syria and Turkey which could bring in other nations (Iran possibly?).