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UK stock market commentary (October 25, 2012): UK GDP, buy the rumour sell the fact?

Since the headlines are saying that Our Dave has given the game away on today’s UK GDP then it would be disappointing to see a figure of less than the expected 0.6% bounce in GDP which is due to be released this morning. Sterling saw some strength yesterday and sustained its gains after the PM made his comments at Question Time and this morning cable is being pushed a little higher still in anticipation from traders that we could see a better rebound in growth than is expected. This could be a classic case of buy the rumour sell the fact and we are even seeing the FTSE edge higher in early trade.

The fact of the matter is however that no matter how good today’s data is the UK economy is flat lining at best. Near to zero growth for this year and prospects for 2013 aren’t all that much better either. Today’s figures will be loaded with a temporary boost from the Olympics and even though the rate of unemployment has been falling, retail sales have held up and the services sector is still expanding according to the PMIs, according to the CBI manufacturing output is at its lowest level for three years and the construction sector remains in the doldrums. On top of that things over on the continent do not seem to be improving much after yesterday’s raft of bad manufacturing and services data which showed an even deeper contraction than was thought.

Yesterday's modest improvement in the US housing sector figures was easily overshadowed by the Federal Reserve’s comments regarding economic growth and employment. As widely anticipated the benchmark interest rate in the US was left unchanged at 0.25% but the pace of growth remains anemic and the jobless rate is still at elevated levels. This was enough to send the Dow lower by almost 50 points to end at 13,062, but this morning the FTSE is starting the day with a spring in its step as the news flow overnight has been quite equity positive. As much as I’d like to say the buyers are creeping back in due to high expectations ahead of this morning’s GDP data it is more likely due to the fact that Japan has endorsed it’s next substantial stimulus package and China believes that output growth in the final quarter will be much faster than in Q3. At the time of writing the FTSE is at 5835 so bulls will be looking to see a test of the near term resistance seen at 5870, meanwhile support is seen at the recent lows around 5780.

It seems the Fed’s decision to keep the same levels for its asset buying program instead of increasing it to tackle ongoing signs of stuttering kept investors on the edge. No additional stimulus meant no reason for now to exit the greenback. If anything the US dollar continued to rebound slightly versus the euro on consideration the US economy looks in a better shape than Europe’s. Overall, the EUR/USD pair lost 12 pips to 1.2972 but this morning has managed to get itself back above the 1.3000 level to 1.3010 at the time of writing.

Gold closed at $1701.0 yesterday nearing its weakest level in around seven weeks as the Fed helped boost the dollar's safe haven appeal by announcing its commitment to economic stimulus measures. Gold peaked to $1790.1 in early October after monetary easing measures involving the purchase of mortgage-backed debt, but has since declined after releases of relatively good global economic data and a reinforced dollar. Bargain hunters are eyeing a support level of around $1700 and possible catalysts include a strong rupee in India, a big buyer of gold during the festive season.

A bigger than expected build in the US oil stockpiles as indicated by the Department of Energy, (5.9 million barrels vs. 1.8 million barrels) was enough to sent the WTI crude prices 96 cents down for the day to $85.59. In addition, the Federal Reserve comments about slow growth and still high unemployment were not exactly encouraging, adding to the risk adverse mood seen currently in the energy market.