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UK stock market commentary (October 15, 2012): Could we really see a new US President next month?

It looks like the US Presidential elections are going to be a closer fought competition than has previously been thought as Romney has now managed to get his nose ahead in most of the important polls, some by a couple of points in the so called key swing states which is really putting the pressure on the Obama camp. What was unthinkable only a few weeks ago is becoming very much a distinct possibility that we could see a Republican President back in the White House come the New Year which could really bring mixed blessings, not least a bout of uncertainty as to just how much Romney will want to scale back the size of the bloated state.

It is amazing just what one television debate can do for your election prospects, just as we saw here when Nick Clegg was propelled to popularity after the first debates here in the UK as the last election and tomorrow’s second debate between the two candidates is just as important. If Obama performs as badly as he did in the first debate, where he actually looked like he didn’t even want to be in the running, you’ve got to say he’s on his way out.

A new President would throw all sorts of questions up in the air, but most importantly what would Romney do to prevent a possible US recession when they have plans to replace Ben Bernanke and change the way the Fed is undertaking monetary policy, as well as undertake a big review in the way the state spends its money, which in other words means spending cuts. Such a victory for the Republicans might actually lead to a sell off in risk assets due to the unknowns of such a result.

But for now the markets seem to be concentrating on other things and in particular the US earnings season. Last Friday saw increased uncertainty regarding corporate America’s earnings and on top of this the IMF’s downside projections to growth kept investors on the back foot. The Dow lost 38 points to 13,313 despite a jump in consumer confidence and a fall in jobless claims figures earlier in the week, but for now we are calling the Dow to open higher by 40 points to 13,353 as European indices start the week in a positive mood.

The highlight of this week is Thursday and Friday’s EU summit where politicians will spend time catching up on what they did on holiday during the summer whilst maybe touching on the topic of an EU wide banking union and what to do with Greece and Spain. Some investors may well be positioning themselves for a Spanish bailout soon as they push risk assets higher this morning with the FTSE trading at 5810 at the time of writing, well above our initial calls earlier.

The European policy makers are trying desperately to contain the region’s debt crisis which threatens its stability and the project as a whole. Lately, even Germany has adopted a milder tone against Greece and looks that it might be in favour of further concessions. On Friday, the euro gained 29 pips to 1.2955 but this morning the move higher by risk assets is lifting EUR/USD with the cross trading at 1.2950 at the time of writing.

On Friday gold declined to its lowest level in two and half weeks on news that China may not need additional stimulus measures after export figures exceeded expectations for September. It closed at $1754.2 and this morning is extending falls from the previous session, as stop-loss selling more than offset support from China inflation data suggesting that putting the brakes on monetary easing was inevitable. This is not just the case in China but, also in the US where data showed that consumer sentiment rose to a five year high so the Fed can perhaps trim quantitative easing.

The WTI crude prices lost 63 cents to $92.17 on Friday as a gloomy outlook on the global economy discarded growing Middle East tensions and timid signs of improvements on the US economy. However, overall for the week oil prices were on the rise indicating that the conflict between Syria and Turkey on top of the Iranian nuclear program are keeping energy investors on the edge and have the potential of triggering a spike in prices at any moment.