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UK stock market commentary (September 05, 2012): Markets still struggle to find footing ahead of ECB

Investors are having their nerve tested in the run up to tomorrow’s ECB meeting which is seen by many as crunch time for not only the eurozone but has ramifications for the global economy as well. The crisis continues to rumble on and yesterday’s move to the downside in equity markets gives a small indication of just how worried people are becoming particularly when press reports have been expressing their doubts over whether Mario Draghi will actually be able to deliver what investors want.

Whilst the ECB President is making his final touches to the plans he will announce tomorrow in Greece the troika are going through their books to see just what they’ve done in order to tackle their bulging deficit. The major problem here though is that no matter how much the Greeks attempt to rein in spending by lower pay and making themselves more competitive and finally there are signs that they are actually doing this, their outstanding debt obligations are so vast and the repayments the government is having to make on those debts completely outweigh any sort of efficiencies they are making. The deep entrenched recession means that the EU, ECB and IMF will have to continue to prop up the country for years, if not decades to come just to keep it in the eurozone. Even the most ardent pro European is likely to lose patience at some point and throw in the towel.

Politicians have been frantically assessing what a Greek exit would mean for not only the eurozone economy, its banking system and the impact it would have beyond Europe, but for the European project as a whole. If one country with unsustainable debts can just default and leave then what about others? Will Portugal, Ireland or even Spain and Italy be next? One thing is for sure and that is that it will be years before we know.

As mentioned markets suffered a bit of a blow yesterday sending the FTSE down by almost three digits and elsewhere on the continent the losses were enough to probably catch Mario Draghi’s attention. This morning things are a little more sanguine with the FTSE trading roughly flat at 5670 at the time of writing. Having made this little move to the downside through the support around 5730/00 this break now puts support at 5640. To the upside resistance is seen at 5730.

Bizarrely the UK services PMI data which was due to be released today was revealed yesterday and with a far better figure than expected. This data shows that the overall UK economy might be in a recession, however the services sector continues to remain in expansion territory. This could lead to another upward revision of Q2 GDP although will not be enough to bring back to a positive number.

The US dollar saw the demand for its safe haven status rising yesterday as the manufacturing picture around the globe continued to deteriorate. China, Europe and now the US are struggling, fuelling worries the world could slip back into recession. Nonetheless, the drop in the EUR/USD pair of just 19 pips to 1.2566 could also imply hopes that ECB President Mario Draghi could after all deliver on his intention to start buying government bonds in order to save the euro.

Gold investors have interpreted the gloomy manufacturing data as strengthening the case for another stimulus package and pushed the yellow metal further up. The gain of only 2.90 to 1695.00 could suggest a cautious approach at the same time, ahead of crucially important events due to take place in Europe and the US. The bulls will now be hoping for a break and hold above the $1700.00 mark.

Despite the lingering high rate of unemployment, the WTI crude prices moved up in the last few months on hopes of QE3 and signs the US economy is improving. The latter was placed under questioning yesterday when the manufacturing numbers disappointed for the third time in August. So, energy investors rushed to the exit with the WTI prices plunging $1.84 to $95.30.