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UK stock market commentary (October 12, 2012): Growth - the new buzz word

If it hadn’t already become the buzz word within the financial markets throughout the crisis we are enduring it certainly is now. Growth is mentioned in the headlines on a daily basis now as central bankers and senior economic forecasters are calling for politicians to address the problem because at this rate many of the world’s biggest economies will be back in recession, if they are not already there. Calls for a slow down in the pace of austerity are becoming louder as rather like the financial markets at the moment we are in danger of seeing many developed economies simply flat lining.

But in some cases a flat economy is not a bad thing and is far better than the worst case scenario of a recession. For the UK at least whilst the economy is most definitely in the flat line camp jobs are still being created and we have a service sector that is still expanding. The worry of course is that a continuation of the economy going into recession, out of recession, in, out is that it doesn’t do much for confidence amongst business and consumers, so job creation may not continue for all that much longer unless there’s light at the end of the tunnel in terms of real growth prospects as opposed to just more money printing. If the measures to free up bank lending rules work, then that could at least be one boost to the economy we will see over the course of the next couple of months.

The markets have been stuck like a rabbit in the headlights over the past couple of weeks. The strong rebound since June really seems to be running out of steam and yesterday’s strength in European indices did not rub off on the Dow which initially rallied following the release of a report by the US Labour Department indicating a 30,000 drop in unemployment benefits. The optimism did not last long as investors were still concerned by the slow pace of economic growth in the US, the turmoil in Europe and China finding it difficult to expand at double digit rate so the Dow actually ended up in the red closing lower by 20 points at 13,326. The US markets’ reluctance to test their 2012 highs and take them out is getting the bulls nervous and with so many negative headlines out there it’s hard to get excited about stocks at the moment, especially since the US earning season has not exactly got off to the best of starts.

In Europe this morning the retreat by the Dow from its highs has filtered through and so we are in the red at the time of writing. Not by much though as the FTSE is lower by 15 points to 5815 at the time of writing, so all eyes are on the near term support and resistance levels to see if a break through them can turn into something more extended. Support and resistance is seen at 5800/5790/5775 and 5845/60/80 respectively.

As an immediate reaction to the downgrading of Spain’s credit rating, the shared currency dropped versus the greenback. Nonetheless, it was also speculated the Spanish government would feel under increased pressure to ask for a bailout from the ECB. Ironically, that turned the table and pushed for a rebound with the euro gaining 76 pips for the day to 1.2929. This morning the euro is gathering a little bit of pace with EUR/USD at 1.2965, but all the eyes are now on the other credit rating agencies, or is there something else we’re missing – an imminent Spanish request for a bailout perhaps?

Gold rose for the first time in five days yesterday closing at $1767.1 and ending its worst run in more than two months at last. It rose by around 0.4% as investors are still bullish on its long term outlook in light of the eurozone debt crisis and Spain's credit downgrade. The precious metal has traded between the $1756 and $1795 level this week, without any fresh catalysts to drive it from that range.

The crude prices were firm on the offence yesterday as rising tensions between Syria and Turkey threatened to disrupt supplies considering the latter is home to a number of pipelines. If anything the higher than expected build in the weekly crude inventories, reported by the US Department of Energy only managed to limit the advance rather than reverse the trend. So the WTI crude prices rose 80 cents to $92.07 as conflict risk premium is back.