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UK stock market commentary (October 18, 2012): For once an EU summit that isn't panic ridden

Today sees the EU summit get underway and for once it is nice to feel that there isn’t a real sense of urgency or panic in the run up to this event. Of course we’ll see the usual back slapping and chin wagging before little is announced come the end of Friday, but for once discussions will not be focused on how to prevent a member state of the eurozone from exiting, rather how greater integration can be achieved fiscally. All thanks to the ECB following their OMT plans that were announced only weeks ago which for now has kept a lid on the borrowing costs of the danger countries like Spain and Italy but that won’t stop the politicians over the next couple of days from claiming a temporary victory for now.

The overall good news is that sentiment towards the eurozone has most definitely taken a turn for the better. Talks between the troika and Greece seem to have progressed far better than in the past and recently there have even been upgrades to export and growth expectations for much of the eurozone. Of course it’s the continued expectation that Spain will soon request a formal bailout that is really fueling the risk appetite we’ve seen in the past few days so there will also be many ears listening out to hear if that likelihood increases. There’s little chase of such an announcement in the next couple of days as the Spanish PM goes into the week end with some important regional elections that he has to fight, and even though the poll ratings are looking ugly, the results could potentially be far worse if he requests any sort of additional financial assistance ahead of those votes.

So for now all seems quiet on the European front, but we will see how things develop over the next couple of days and whether any progress can be made on the banking or fiscal union front. Yesterday’s trade in the US was very flat with the recent momentum just seeming to dry up temporarily as decent economic data in the form of housing stats was countered by weaker corporate numbers from IBM.

This morning there’s a little bit of red across the screens of European traders with the FTSE lower by just a handful of points at 5905, still managing to hold onto the 5900 level. So for now the bulls are having a breather as we go into the EU summit and rightly so considering we’re up over 2% this week alone. Key near term support and resistance levels are seen at 5885/35/5770 and 5930/50 respectively but it’s all eyes on the support levels to see if the index can maintain its upward momentum.

The common currency extended its recent rally to a four week high against the US dollar, closing 66 pips up at 1.3118. Investors were somewhat reassured by Moody’s holding Spain’s investment grade and continued to buy back into the shared currency. One other reason in favour of bulls might have been the good results for the euro zone trade balance which was positive and above initial estimates. This morning a little bit of profit taking seems to be creeping in with EUR/USD just drifting back below 1.3100 to 1.3090 at the time of writing but with the EU summit over the next couple of days there may not be many bears out there to bet against the single currency.

Gold is trading steadily after gaining over the past two days and closing at $1749.6 yesterday. Investors are looking for a fresh catalyst to spark gold and all eyes are on the eurozone as leaders gather for a two day meeting in Brussels. Data showing a slowdown in China for the seventh quarter running was shrugged off and its relationship with the dollar is being watched closely as good sentiment in the euro zone is supporting the euro and weighing on the dollar, making commodities, like the precious metal, attractive to holders of other currencies.

We had two reports yesterday with opposite effects which by and large kept the WTI crude prices rather flat around $92.50 mark. On one hand, the rise in the US new home construction fuelled optimism that demand for energy will stay strong in the near future. But on the other hand, the Energy Department indicated a higher than estimated build in oil inventories which showed the market is also well supplied.