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UK stock market commentary (September 03, 2012): Historically negative September gets off to strong start

So it’s back to school for most and politicians return to Parliament as the summer draws to a close and September gets under way. A month that historically brings declines for the FTSE it will be interesting to see how the Autumn months pan out as expectations for central bank stimulus continue to build even if at Jackson Hole last Friday Ben Bernanke refused to add and fuel to the fire.

This week will see our mate Dave try to reinvigorate the Coalition whilst at the same time attempt to quash what looks to be the start of some direct attacks on his leadership. Some big decisions need to be made in order to revive the British economy which has been pinning hopes on Jubilee week ends and Olympic games to drag itself out of recession as things aren’t getting any better across on the continent. In order to prevent unemployment from getting any worse confidence needs a boost for which government plays a big part. Of course it doesn’t help much when your biggest trading partner is in complete and utter dire straits, but as many people return to school or work it is the political leaders, both domestically and in Europe, to whom they turn for clear direction. They cannot rely purely on central banks to spur growth.

But for financial markets the focus will remain on central banks as this week’s ECB meeting on Thursday sees investors hoping for some sort of announcement of a plan to rein in peripheral bond yields. The Fed and ECB have been playing a game of poker in that one doesn’t want to move before the other and certainly in the case of the Fed they are not presiding over an economy that is in recession or a sovereign debt crisis (at the moment!), so for them the urgency to act is less. With nothing more that consistent rhetoric from Ben Bernanke last Friday, all eyes and ears are on Mario Draghi this week, especially since he stayed in Europe to thrash out his plans rather than swanning off to Bernanke’s symposium. Spain have also got a big calendar date ahead with the redemption of €15 billion worth of bonds next month, which could prove the deciding factor as to whether they get a full blown bailout or not.

This morning European markets are taking a bit of a contrarian view at the moment with the start of this September being a signal to buy back into equities that have been languishing in the past couple of weeks. The FTSE is in much better shape that we had been previously calling on the open with the index higher by some 30 odd points to 5745. Clearly investors are getting into buying mode early ahead of Thursday’s ECB meeting where the hope is that Mr Draghi will deliver something special to prevent the eurozone crisis from escalating further.

The US dollar was hurt by Ben Bernanke’s comments saying he stands ready to use extra monetary easing if the jobless rate continues to remain elevated. Although it was not a clear signal of QE3, investors took it as ‘good enough for now’ and exited the greenback which lost 70 pips versus the euro to finish at 1.2576. Looking ahead, the non-farm payrolls report due this Friday will undoubtedly be this week’s focus point, as well as the ECB meeting.

We saw a sharp rise in gold prices on Friday, as Ben Bernanke seemed unhappy with the current unemployment level and being prepared to take measures to address that. Despite the lack of details or even the clear mentioning of QE3, precious metals investors started buying aggressively pushing gold prices $36.10 up to $1691.40, a new recent high.

In leaving the door open for additional stimulus, Bernanke also helped the energy sector with the WTI crude prices rising $1.72 to $96.47. A better than anticipated reading for the University of Michigan Consumer Sentiment indicated the economic data is still coming in strong which should support the demand for oil. Last but not least, a weaker US dollar and a rebounding stock market accentuated the rally.